In accounting, the ledger account consists of two sides, one is the debit side and the other is the credit side. The left hand side of the ledger account or T-account is known as the debit side and right hand side is known as the credit side.
Debit is denoted by Dr while credit is denoted by Cr. In a double entry bookkeeping system, whenever a transaction occurs it impacts two accounts. For example, if a furniture is purchased with cash, it will result in an increase in furniture account while it will result in decrease of cash as the cash will be flowing out of business.
Now, as we know that every ledger account has a debit and credit side, the point to think about is which side will increase and decrease of the account will be recorded. For this, we need to understand the normal balance of the account and the debit and credit rules.
Normal Balance of Accounts
The normal balance of accounts is a good way to understand the rules of debits and credits. It is said that if the normal balance of the account is debit, then any increase in that account will be recorded on the debit side, while any decrease in the same account will be recorded on the credit side.
Similarly, if the account is having normal balance as credit, then any increase on that account will be added to the credit side, while any decrease in that account will be added to the debit side.
As per the accounting conventions, the normal balance of all the expenses and asset accounts is debit, while the normal balance of all equity and liabilities is credit. For special accounts such as contra accounts, it behaves the opposite of the account to which it relates.
General Rules for Debit and Credit
The following rules can be said to be applicable in debit and credit.
1. Accounts containing debit balance will increase when a debit is added and reduce when credit is added. The examples of such accounts are assets, expenses and dividends.
2. Accounts containing a credit balance will increase when a credit is added and decrease when a debit is added to them. The examples of such accounts are liabilities, revenues and equity.
3. Contra accounts are such accounts that will reduce the amount of accounts with which they are paired by behaving in the exact opposite way to the paired account.
4. The amount of debit should be equal to the amount of credit in a transaction. Preparing financial statements from such transactions will result in incorrect statements.
This concludes the topic of Rules of Debit and Credit, which is an important topic of Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S