Rules of debit and credit for every type of account

In this article, I am explaining the basic concepts of debit and credit in commerce. These concepts are useful for commerce students and also anyone who wants to commence their own business. Every employee should be familiarized with basic book keeping and accounting. They should learn how the concepts of debit and credit are applied to every type of account.

In the first year, the commerce students study the concepts of credit and debit and classification of account. The students should understand these concepts properly so that they can accurately prepare final statements. Every businessman should also know the basic concepts of accounting to prepare final statements accurately and estimate the amount taxable during the year. Some science graduates apply for a position in banks or other governmental organizations. They study the basics of accounting and become account managers later. Many people are working as accountants in large organizations today and are earning attractive perks. Every commerce student and account should understand some important aspects of accounting. Every transaction has two-side effects namely credit and debit. Whenever any transaction takes place in the business, they should allocate the amount to the respective account. They should know the techniques of passing journal entries. Today, the accountants should only pass the journal entries accurately. These entries are automatically posted to the respective ledger. Hence, the final statements are also prepared automatically in the software.

Understanding the rules of debit and credit for every account

Accounts are classified into three categories namely Personal account, Real Account and Fictitious accounts. The term 'credit' and 'debit' is used differently for every transaction based on the type of accounts.

Personal Account

A person may borrow cash or any asset from a business entity on a credit basis. If he should owe something to the business or should receive something from a party, then his account is created in the books of the party with whom he deals. For eg. If Mr X borrows machinery worth Rs. 1,00,000 from Firm A. Then, the Firm A creates an account named 'Mr X and he becomes a debtor in the books of Firm A. So, if a person or a firm has lent something, then they are known as creditors. If they borrow something, then they are termed 'debtors'. So, for personal accounts credit means to give something and debit means to take something. For eg. If a business ABC is selling machinery to business BCD, then ABC becomes a creditor and his account is credited in the books of BCD company.

Real Account

It refers to the assets of the business. So, when the assets are sold, then the journal entry is passed in the books of accounts as follows:
Cash a/c .........Dr.(if the party has paid the cash)
To asset a/c.......Cr

Company X a/c......Dr( if the party has purchased on credit)
To asset a/c .........Cr.

If the company or business purchases the assets, then these assets are debited in the books of accounts. Cash is also a type of 'real asset'. The tangible assets such as buildings, cash, furniture, machinery etc are known as real accounts.

Fictitious accounts

It refers to the gains and expenses of the business entity. The gains are referred to as 'credit and the loss that a company undergoes is termed as 'debit'. But an increase in liability is termed as 'credit' and reduction of debts is termed as 'debit'.

How to apply the rules of debit and credit to a transaction

The rules of debit and credit should be applied properly. So, the accountants should analyze the effect of a transaction. What information can you derive from the transaction? Does the transaction state about the givers and receivers, the assets that are purchased or sold, or the gains and expenses of the business? Which parties are involved in the process?

For eg. Mr X sells goods to Mr Y for a credit of 20,000, then the journal entry is passed in the books of a/c as follows :

Mr Y ............Dr 20,000 Rs.
To Goods a/c ......Cr Rs. 20,000

So, analyzing the effect of this transaction, Mr X has sold goods to Mr Y but he has not paid him the amount yet. So, since his account with Mr X, is not yet settled, his account is debited in the books of Mr X. The goods are the assets of the organization and already sold to the party. So, the goods a/c is credited in the books of Mr X. Who is buying goods on credit from Mr X? Which product is Mr. X selling to Mr Y?

If Mr X sold his goods to Mr Y and he pays an amount to Mr X in cash, then the entry is passed in the following manner in the books of Mr X.

Cash a/c..........dr 20,000 Rs.
To Goods a/c..........................20,000 Rs.

So, Mr Y has already paid cash to Mr X and so cash account is debited. If Mr Y did not pay the cash, then Mr Y a/c is debited. The goods are sold to the party and hence Goods a/c is credited.


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