3. Using Debit & Credit

USING DEBIT AND CREDIT

Rules of Debit and Credit

Traditional or English Approach: This approach is based on the main principle of double entry system i.e., every debit has a credit and every credit has a debit. According to this system we should record both the aspects of a transaction whereas one aspect of a transaction will be debited and other aspect of a transaction will be credited.

(1) Personal Account: The accounts which related to an individual, firms, company, or an institution.

Personal account classified three categories:

(i) Natural person accounts -Mohan, Seeta, bank, capital, and drawing. Debtors, creditors account

(ii) Artificial personal accounts-company, firms and institutions.

(iii) Representative personal accounts- outstanding expenses, prepaid expenses, accord income and received in advance.

RULE

Debit - the receiver

Credit - the giver

(2) Real Account: The account all of those things whose value can be measure term of money like cash, goods, furniture, goodwill etc.

RULE

Debit what comes in

Credit what goes out.

(3) Nominal Account: these accounts include the account of all expenses and incomes. Like rent, salary, interest, commission, discount received/allowed etc.

RULE

Debit all expenses & losses

Credit all incomes and gains.

(2) Debit and Credit rules (Modern or American Approach)

This approach is based on the accounting equation or balance sheet. In this approach accounts are debited or credited according to the nature of an account. In a summarized way the five rules of modern approach is as follows:

1. Increase in asset will be debited and decrease will be credited.

2. Increase in the liabilities will be credited and decrease will be debited.

3. Increase in the capital will be credited and decrease will be debited.

4. Increase in the revenue or income will be credited and decrease will be debited.

5. Increase in expenses and losses will be debited and decrease will be credited.

IMPORTANT NOTE:

1. Increase in Assets/ Expenses and Losses will be debited and decrease will be credited

2. Increase in Liabilities/ capital/ Revenue or Gain will be credited and decrease will be debited