Debiting and crediting are fundamental principles used in double-entry bookkeeping to record financial transactions. These principles help maintain the balance and accuracy of accounts. Here are the rules of debiting and crediting with suitable examples:
1. Debit Rule:
- Debit the receiver, increase in assets, or expenses.
- Debit the accounts on the left side of the ledger.
- Debit entries are recorded on the left side of the T-account.
Example 1: Cash Purchase
Suppose a company purchases office supplies for $500 in cash. The appropriate debit entry would be:
Office Supplies (Asset Account) - Debit $500
Example 2: Expense Payment
The company pays $1,000 for rent expense. The appropriate debit entry would be:
Rent Expense (Expense Account) - Debit $1,000
2. Credit Rule:
- Credit the giver, decrease in assets, or increase in liabilities and equity.
- Credit the accounts on the right side of the ledger.
- Credit entries are recorded on the right side of the T-account.
Example 1: Sales on Credit
The company sells goods to a customer for $1,000 on credit. The appropriate credit entry would be:
Accounts Receivable (Asset Account) - Credit $1,000
Example 2: Borrowing from a Bank
The company obtains a loan of $10,000 from a bank. The appropriate credit entry would be:
Bank Loan (Liability Account) - Credit $10,000
It's important to note that every transaction involves at least one debit and one credit entry to ensure that the accounting equation (Assets = Liabilities + Equity) remains in balance. The debit and credit rules help maintain this balance and provide a clear record of financial activities.
