Debits and credits are fundamental accounting terms used to record transactions in a double-entry bookkeeping system. The two major rules of debits and credits are that all debits must equal all credits, and the receiver of monetary value is debited and the giver of monetary value is credited. However, there are additional rules that help ensure accurate accounting.
Rule 1: Debit the Receiver and Credit the Giver
This rule is primarily used when recording transactions involving personal accounts. When recording a transaction, the receiver is debited and the giver is credited. For example, when a customer purchases goods, the customer must be debited (the receiver) and the business must be credited (the giver).
Rule 2: Debit What Comes In and Credit What Goes Out
This rule is used when recording transactions involving real accounts. The account that increases or receives an asset is debited and the account that decreases or expends an asset is credited. For example, when a business purchases equipment, the account Equipment must be debited (what comes in) and the Cash account must be credited (what goes out).
Rule 3: Debit Increases and Credit Decreases
This rule is used when recording transactions involving nominal accounts. The account that increases is debited and the account that decreases is credited. For example, when a company pays rent, the Rent Expense account must be debited (increases) and the Cash account must be credited (decreases).
The following statement is not a correct rule of debit and credits: “Debit the giver and credit the receiver”. This statement is incorrect because the receiver should be debited and the giver should be credited. This is the opposite of debiting the receiver and crediting the giver, which is the correct rule.