The Rules Of Debit And Credit.docx

The Normal Balance of Accounts The accounting equation is divided into two sides (left and right) which are accounted to always maintain a balanced amount. In other words, if the SFP is constructed immediately after each transaction, it should always be that the total assets must be equal to the totals of the aggregate liabilities and owner’ equity.

Normal Balance of Statement of Financial Position Accounts

DEBIT

=

Assets

=

Debit means the value received. Assets are initially recorded on the debit side of the equation. To debit an asset is to increase an asset. To credit an asset is to decrease it

CREDIT Liabilities And Capital Credit means the value parted with. Liabilities and Capital are initially recorded on the credit side of the equation. To credit a liability and/or capital is to increase them. To debit liability and/or capital means to decrease them.

Normal Balance of Statement Comprehensive Income DEBIT

=

Expense

=

Expenses are initially recorded on the debit side. To debit an expense means to increase an expense. To credit an expense is to decrease it

CREDIT Revenue

Revenues are initially recorded on the credit side. To credit revenue means to increase an income. To debit revenue means to decrease it.

The “two sides” of the accounting equation is an application of the dual aspect concept which provides that every value received must have a corresponding value parted with. This concept is the basis of the debit and credit in recording economic transactions and event. The two equal sides define the foundation of the rules of debit and credit.

THE RULES OF DEBIT AND CREDIT The rules of debit and credit are based on the normal balance of an accounting element or account. The term “normal balance of an account” refers to the usual position of an account in the T-account. Asset accounts are normally in the debit side while the liability and owner’s capital accounts are normally in the credit side. The normal balance of an account provides the basis in analyzing when to debit and credit an account. The following rules must be observed when to debit or credit an asset, liability, and capital accounts.

Rule 1 –

Assets:

Debit to increase the amount of asset. Credit to decrease its amount.

Asset Account Debit

Credit

Increases

Decreases

To illustrate, assume the following information: 1. January 5, Pearl Services bought P 3,000 worth of supplies on account. 2. Pearl used P 2,500 worth of supplies during the month. The remaining unused supplies at the end of the month amount to P 500. Using the T-account method, the analysis would be as follows:

Unused Supplies Increase

Debit 1/5 1/30

Remaining balance of unused supplies

decrease

Credit 3,000 1/30 500

2,500

Rule 2 – Liability:

Credit to increase the amount of liability. Debit to decrease its amount.

Liability Account Debit

Credit

Decrease

Increase

To illustrate, assume the following information: 1. January 5 – Pearl Services bought P 3,000 worth of supplies on account. 2. January 18 – Pear paid 1,800 for the said obligation. After the partial payment, the remaining accounts payable decreases to 1,200. Using the T-account method, the analysis would be as follows: Accounts payable

Increase

Decrease Debit 1/18

Remaining balance of accounts payable

Credit 1,800 1/5

3,000 1,200

Rule 3

:

Owner’s Equity: Credit to increase the capital account; Debit to decrease its amount Owner’s Equity Account Debit

Credit

Decrease

Increase

To illustrate: assume the following information. 1. January 1 – J. Pearl invested 90,000 cash into his business. 2. June 1 – J. Pearl withdrew 60,000 cash as permanent withdrawal from the business. The remaining balance of capital after the permanent withdrawal by the owner amounts to 30,000. Using the T-account method, the analysis would be:

J. Pearl, Capital Decrease

Decrease Debit 6/1

Remaining balance of accounts payable

Credit 60,000 1/1

90,000 30,000

Rule 4

Revenue:

Credit to increase the revenue account. Debit to decrease its amount.

Revenue Account Debit

Credit

Decrease

Increase

To illustrate: assume the following information. 1. December 1 – Pearl Service recorded service income of 10,000 cash. 2. December 31 – Pearl determined that the recorded service income on December 31 should not be 10,000. The correct amount is 1,000. Pearl reduced the service income by 9,000. Observe that the remaining balance of service income account after decreasing it by 9,000 is the correct amount of 1,000. Using the T-account method, the analysis would be as follows:

Decrease

Increase Debit 12/31

Remaining correct balance of revenue

Credit 9,000 12/1

10,000 1,000

Rule 5

Expense:

Debit to increase the expense account. Credit to decrease its amount.

Expense Account Debit

Credit

Increase

Decrease

To illustrate: assume the following information. 1. December 1 – Pearl Service recorded service income of 10,000 cash. 2. December 31 – Pearl determined that the recorded service income on December 31 should not be 10,000. The correct amount is 1,000. Pearl reduced the service income by 9,000. Observe that the remaining balance of service income account after decreasing it by 9,000 is the correct amount of 1,000. Using the T-account method, the analysis would be as follows:

Rent Expense

Increase Debit 12/31

Remaining correct balance of revenue

Decrease

Credit 12,000 12/1 1,200

10,800