In accounting, the rules of debit and credit are the foundation for recording financial transactions. These rules are part of the double-entry bookkeeping system, where every transaction affects at least two accounts—one with a debit entry and one with a credit entry. The basic rule is that for every debit, there must be an equal and corresponding credit.
Debit Rules:
- Assets: When assets increase, they are debited. For example, when a company buys equipment, the Equipment account is debited because the company’s assets have increased.
- Expenses: When expenses are incurred, they are debited. For instance, paying rent or utility bills will result in a debit entry to the Rent Expense or Utility Expense account, reflecting the increase in the company's costs.
- Drawings: When the owner withdraws money from the business for personal use, it is debited to the Drawings account. This reduces the equity of the business.
Credit Rules:
- Liabilities: When liabilities increase, they are credited. For instance, if the business takes out a loan, the Loan Payable account is credited because the business now owes more money.
- Revenue: When revenue is earned, it is credited. For example, when the business makes a sale, the Sales Revenue account is credited because the company has earned income.
- Equity: When there is an increase in the owner's equity, it is credited. For example, if the owner invests more money into the business, the Capital account is credited to reflect the increase in the company's equity.
The Basic Formula:
- Debit = Increase in assets or expenses or decrease in liabilities/equity/revenue.
- Credit = Increase in liabilities or revenue or decrease in assets/expenses.
In essence, debits and credits maintain the balance in the accounting equation (Assets = Liabilities + Owner’s Equity), ensuring that financial records are accurate and complete.
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