For every transaction there are two aspects. One is called Debit and the other is called Credit. The debit and credit aspects of a transaction are to be identified based on the principles of double entry system of accounting.
Debit refers to entering an amount on the left side of an account and Credit means to enter an amount on the right side of an account. The abbreviated form of Dr. Stands for Debit and Cr. Stands for Credit. Rules of debit and credit is based on dual aspect concept i.e. every transaction has Debit effect and an equivalent credit effect.
Before deciding which account is to be debited or credited, it is necessary to decide the nature of accounts which are influenced by the business transactions.
The rules of Debit and Credit are given below
Personal Accounts: (Natural Persons and Artificial Person)
Debit the Receiver
Credit the Giver
According to the above principle, the benefit receiver’s account is to be debited and and the benefit giver’s account is to be credited.
- Goods purchased from Ramesh on credit for 2,000 .
The two accounts involved in this transaction are goods purchased A/c and Ramesh A/c. so, Ramesh is the Giver of the goods. Hence Ramesh account is be credit (i.e. credit the giver rule applies) goods purchased is expenditure, so nominal account, hence is to be debited.
- Goods sold on credit to Mahesh Rs. 5,000/-
In this transaction Mahesh is receiving the benefit from the business. Hence, Mahesh account is to be debited and goods sold is an income, so nominal account hence to be credited.
- Cash paid to Mohan Rs. 500
In this transaction cash ( asset – real account) is going out and Mohan (personal – personal A/c) is receiving cash. Hence Mohan account is to be debited and cash account is to be credit.
- Cash received from Sathish Rs. 800
In this transaction Sathish (person) giving cash and cash (real A/c) is coming into business. Here Sathish is the giver. Hence, his account is to be credited.
Debit What comes in
Credit what goes out
According to real accounts principle, when an assets is received by the business, the asset account is to be debited, when any asset goes out of the business, the asset account is to be credited
- Purchased office furniture for Rs. 10,000.
In this transaction office furniture (asset – Real A/c) is coming in and cash (asset – Real A/c) is going out. Hence, office furniture account is to be debited and cash account is to be credited.
- Received cash from Shankar Rs. 2,000.
In this transaction cash (asset – Real account) is coming in and Shankar (personal A/c) is the giver. Hence, cash A/c is to be debited.
- Cash paid to Manoj Rs. 1,000.
In this transaction cash (asset) is going out and Manoj (personal A/c) is receiving cash. Hence, cash A/c is to be credited and Manoh account is to be debited.
- Old Machine (asset) sold for Rs. 600.
In this transaction cash (asset) is coming in and Machine (asset) is going out. Hence, cash A/c is to be debited and Machine account is to be credited.
Nominal Accounts: (Expenses, Losses, Incomes, Gains)
Debit all Expenses and Losses.
Credit all Incomes and Gains
According to normal account principle, expenses and losses are to be debited and all incomes and gains of the business are to be credited.
- Salaries paid Rs. 5000 In this transaction salaries (expenditure-nominal A/c) is an item of expenditure and cash (real A/c) is going out.
Hence, Salaries A/c is to be debited and cash A/c is to be credited.
- Rent Received Rs. 200
In this transaction, cash (Real A/c) received is asset and rent received is income. Hence rent A/c being income to be credited and cash A/c is to be debited.
- Goods purchased for Rs.8000
In this transaction goods purchased is expenditure (nominal A/c) and cash (asset) paid is real A/c. Hence, Goods purchased account is to be debited and cash A/c is to be credited.
- Goods sold for Rs. 10,000
In this transaction cash (asset) received is real A/c and goods sold (income) is nominal A/c. Hence, goods sold account is to be credited and cash A/c is to be debited.
Characteristics or Fundamental Principles of Double Entry System:- The double-entry system is a scientific, self-sufficient and reliable system of accounting. Following some widely accepted characteristics or principles account is kept under this system.
As a result in one side arithmetical accuracy of the transaction is ensured and on the other side ascertainment of the financial position of the business is easily possible.
Characteristics of double-entry system are stated below;
- Two parties: Every transaction involves two parties – debit and credit. According to the main principles of this system, every debit of some amount creates corresponding credit or every credit creates the corresponding debit for the same amount.
- Giver and receiver: Every transaction must have one giver and one receiver.
- Exchange of equal amount: The amount of money of a transaction the party gives is equal to the amount the party receives.
- Separate entity: Under this system business is treated as a separate entity from the owner. Here the business is considered as a separate entity.
- Dual aspects: Every transaction is divided into two aspects. The left side of the transaction debit and the right side is credit.
- Results: Under double entry system totality of debit is equal to the totality of credit. In it ascertainment of the result is easy.
- Complete accounting system: Double entry system is a scientific and complete accounting system.
Through this system, the account is kept completely and no party is ignored. In fine it can be said that every transaction must possess these characteristics.
If there is an exception to this complete information will not be available in the books of accounting. As a result,
The process of keeping accounts under the double-entry system;
- Journal: At first transactions are recorded in the primary book of accounting called journal.
- Ledger: In the second phase transactions are classified and recorded permanently in the ledger in brief.
- Trial balance: In the third phase the arithmetical accuracy of the account is verified through the preparation of trial balance.
- Financial statements: In the fourth or final stage through financial statements the results of all the financial activities of a year are determined.