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Rules of Debit and Credit

The document outlines the rules of debit and credit for different types of accounts. It states that asset and expense accounts have a normal debit balance, where increases are recorded on the debit side and decreases on the credit side. Liability, revenue/income, and capital/equity accounts have a normal credit balance, with increases recorded on the credit side and decreases on the debit side. Contra accounts always have the opposite normal balance of their related main account, and are used to reduce the value reported for that main account. Examples of contra accounts and their effects are provided.

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121 views3 pages

Rules of Debit and Credit

The document outlines the rules of debit and credit for different types of accounts. It states that asset and expense accounts have a normal debit balance, where increases are recorded on the debit side and decreases on the credit side. Liability, revenue/income, and capital/equity accounts have a normal credit balance, with increases recorded on the credit side and decreases on the debit side. Contra accounts always have the opposite normal balance of their related main account, and are used to reduce the value reported for that main account. Examples of contra accounts and their effects are provided.

Uploaded by

Andrea
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Rules of debit and credit

(1). Asset accounts:

Normal balance: Debit

Rule: An increase is recorded on the debit side and a decrease is recorded on


the credit side of all asset accounts.

(2). Expense accounts:

Normal balance: Debit

Rule: An increase is recorded on the debit side and a decrease is recorded on


the credit side of all expense accounts.

(3). Liability accounts:

Normal balance: Credit

Rule: An increase is recorded on the credit side and a decrease is recorded on


the debit side of all liability accounts.

(4). Revenue/Income accounts:

Normal balance: Credit

Rule: An increase is recorded on the credit side and a decrease is recorded on


the debit side of all revenue accounts.

(5). Capital/Equity accounts:

Normal balance: Credit

Rule: An increase is recorded on the credit side and a decrease is recorded on


the debit side of all equity accounts.

(6) Contra accounts:

Normal balance: Always opposite to the relevant normal account. The normal


balance of a contra account can be a debit balance or a credit balance

An example: Accounts receivable is an asset account that normally has a debit


balance. The allowance for doubtful accounts is a contra account to the accounts
receivable and normally has a credit (opposite) balance.

Other examples of contra accounts include:

 accumulated depreciation account – a contra asset account


 sales returns and allowances account – a contra revenue account
 sales discount account – a contra revenue account
 drawings account – a contra equity account
 treasury stock account – a contra equity account
 bonds discount account – a contra liability account

As the normal balance of a contra account is always opposite to the normal


balance of the relevant main account, it causes a reduction in the reporting
amount of the main account. For example, if the balance in building account is
$500,000 and the balance in accumulated depreciation – building account is
$150,000, the building would be reported at $350,000 (= $500,000 – $150,000) in
the balance sheet.

Rule: If the normal balance of the contra account is debit, the increase will be
recorded on the debit side and the decrease will be recorded on the credit side.
If, on the other hand, the normal balance of the contra account is credit, the
increase is recorded on the credit side and the decrease is recorded on the debit
side.

A summary of the whole discussion about rules of debit and credit is given below:

The following example may be helpful to understand the practical application of


rules of debit and credit explained in above discussion

Example:
The following transactions are related to Small Traders:

1. Started business with cash $95,000.


2. Furniture purchased for cash to be used in business $8,000.
3. Purchased goods for cash $40,000.
4. Purchased goods on credit from Big Traders $57,000.
5. Sold goods for cash $5,000.
6. Purchased equipment for business $4,000.
7. Sold goods on credit to John Retailers $1,500.
8. Paid salary to employees $1,200

Required: Identify the accounts involved in above transactions and state the


nature of each account. Also mention how increases or decreases in accounts
resulting from above transactions should be recorded.

Solution:

https://www.accountingformanagement.org/business-transaction/
https://www.accountingformanagement.org/rules-of-debit-and-credit/

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