In accounting transactions are recorded and managed on the basis of a double entry system due to which every transaction is recorded in debit and credit but who has to debit and who has to credit is known by the rules of debit and credit. Without knowing the rules of debit and credit, transactions cannot be recorded in accounting.
The rules of debit and credit can be understood from two approaches, the first and the oldest is the traditional approach and the second and the newest is the modern approach. In both approaches, the transactions are divided based on their nature so that the respective rules can be applied to them. For example, in the traditional approach, the transactions are divided into personal account, real account, and nominal account and in the modern approach, the transactions are divided into asset account, capital account, expense account, liability account, and revenue account.
Table of Contents
Rule of Debit and Credit
There are two approaches to understanding the rules of debit and credit:
| Rule of Debit and Credit | – Traditional Approach – Modern Approach |
Traditional Approach
Following are the rules of debit and credit according to traditional approach:
| Traditional Approach | – Personal Account – Real Account – Nominal Account |
1. Personal Account:
The rule of personal account applies to all transactions related to a person. If talk about transactions related to a person, then these include those transactions in which a person is involved and this person can be a living or artificial person like a human being, club, society, company, etc. and if we talk about accounts, then all accounts related to debtors, creditors, banks and owners, etc. come under it. For better understanding, personal account is classified into three parts.
- Natural Personal Account: This includes transactions/accounts involving humans.
- Artificial Personal Account: This includes transactions/accounts relating to artificially created persons like companies, firms, clubs, societies, hospitals, etc.
- Representative Personal Account: It includes transactions/accounts representing natural personal account and artificial personal account such as outstanding expenses, prepaid expenses, etc.
| Rules of Personal Account | – Debit – The Receiver – Credit – The Giver |
Explanation: While recording the transactions falling under the personal account, the one who receives is debited and the one who gives is credited. For example, in the case of a credit purchase, the buyer credits the seller because the seller gave the product to the buyer and the seller debits the buyer because the buyer received the product.
2. Real Account:
The rule of real account applies to all the transactions falling under the real account. Talking about real account, it includes all the transactions related to assets like cash, bank, machinery, building, land, furniture, software, goodwill, patent, trademark, etc. For better understanding, it has been classified into two parts.
- Tangible real account: This includes transactions related to tangible assets. Tangible assets refer to those assets that can be seen and touched such as cash, machinery, building, land, furniture, etc.
- Intangible real account: This includes transactions related to intangible assets. Intangible assets refer to assets that cannot be seen and touched such as patents, copyrights, software, goodwill, etc.
| Rules of Real Account | – Debit – What Comes In – Credit – What Goes Out |
Explanation: While recording the transactions relating to real account, what comes in is debited and what goes out is credited. For example, in the case of a cash purchase, the buyer credits cash as cash has gone out from the buyer and the seller debits cash as cash has come in to the seller.
3. Nominal Account:
The rule of nominal account applies to all the transactions related to nominal account. Talking about nominal account, it includes all the transactions related to income, expenses, profit, loss, etc. like sales, purchase, office expenses, factory expenses, tax, commission, interest, etc. In simple language, all the transactions except the transactions related to personal account and real account are included in it.
Note: Outstanding and prepaid income and expenses fall under the representative personal account, hence nominal account rule does not apply to it.
| Rules of Nominal Account | – Debit – All Expenses/Losses – Credit – All Income/Gains |
Explanation: While recording the transactions relating to nominal account, the transactions relating to expenses, losses, etc. are debited and the transactions relating to income, gains, etc. are credited. For example, in the case of a product purchase, the buyer debits the purchase as the purchase is an expense and the seller credits the sale as the sale is an income.
Modern Approach
Following are the rules of debit and credit according to the modern approach:
| Modern Approach | – Asset Account – Capital Account – Expense Account – Liability Account – Revenue Account |
1. Assets Account:
Asset account rules apply to all transactions related to assets. Asset refers to something owned by someone that has monetary value and can be used to purchase assets, increase wealth, pay liabilities, etc. Cash, bank, buildings, land, machinery, goodwill, patents, trademarks, furniture, etc. are examples of assets.
| Rules of Assets Account | – Debit – To Increase – Credit – To Decrease |
2. Capital Account:
The rule of capital account applies to all transactions related to the owner of the business. Capital refers to the investment made by the owner in the business. The rule of capital account applies not only to the investment of the owner but also to the withdrawals made by the owner.
| Rules of Capital Account | – Debit – To Decrease – Credit – To Increase |
3. Expense Account:
Expense account rules apply to transactions related to expenses and losses. Expenses refer to the cost of buying something and play a vital role in business. Purchases, freight expenses, insurance, commission paid, office expenses, salaries, wages, etc. are examples of expenses.
| Rules of Expense Account | – Debit – To Increase – Credit – To Decrease |
4. Liability Account:
Liability account rules apply to all transactions related to liabilities. Liability refers to financial responsibility and this responsibility arises when a person is liable to give something to someone in return. Creditors, loans, outstanding expenses, etc. are some examples of liabilities. In business, liabilities are shown on the balance sheet.
| Rules of Liability Account | – Debit – To Decrease – Credit – To Increase |
5. Revenue Account:
The rule of revenue account applies to all transactions related to income, profit, etc. Revenue refers to the income generated in the business and it is very important for the business as revenue plays an important role in earning profit. Sales, interest received, royalty received, commission received, etc. are some examples of revenue.
| Rule of Revenue Account | – Debit – To Decrease – Credit – To Increase |
Difference Between Traditional and Modern Approach
| Traditional approach | Modern approach | |
| 1. | Personal Account | Liability Account Capital Account |
| 2. | Real account Personal Account | Assets Account |
| 3. | Nominal Account | Revenue Account Expenses Account |
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QNA/FAQ
Q1. How many approaches are there to understand the rule of debit and credit?
Ans: There are two approaches to understand the rule of debit and credit:
– Traditional Approach
– Modern Approach
Q2. How many rules are there in the traditional approach?
Ans: The traditional approach has three rules:
1. Rules of Personal Account
2. Rules of Real Account
3. Rules of Nominal Account
Q3. How many rules are there in modern approach?
Ans: The modern approach has five rules:
1. Rules of Asset Account
2. Rules of Capital Account
3. Rules of Expense Account
4. Rules of Liability Account
5. Rules of Revenue Account
Q4. Write the rules of personal account.
Ans: The rule of personal account is as following:
– Debit – The Receiver
– Credit – The Giver
Q5. Write the rules of real account.
Ans: The rule of real account is as following:
– Debit – What Comes In
– Credit – What Goes Out
Q6. Write the rules of nominal account.
Ans: The rule of nominal account is as following:
– Debit – All Expenses/Losses
– Credit – All Income/Gains
