Rulers

In all aspects we need to follow some rules. So here is the Rules of Debit and Credit.

What is the significant of the Rules of Debit and Credit?

We can easily determine weather its signifies increase or decrease in an account.

So what are the rules?

Generally, debit signifies increase in Assets, Expense and Drawing (mhemonic: A-D-E) whereas, credit signifies increase in liabilities, capital and revenues (mhemonic: C-R-L). On the other hand, debit signifies decrease in liabilities, capital and revenues, whereas credit signifies decrease in assets, expenses and drawing.

Stated differently,

Debit signifies:

Increase in Assets

Decrease in Liabilities

Decrease in Capital

Increase in Drawing

Decrease in Revenue

Increase in Expense

Credit signifies:

Decrease in Assets

Increase in Liabilities

Increase in Capital

Decrease in Drawing

Increase in Revenue

Decrease in Expense

The application of the rules of debit and credit in determining the account or account to be debited and credited are illustrated as follows:

Atty. Alex Flores, decided to start his practice of law by establishing his own law office. Following are the transactions of the law firm during June, its first month of operation:

The accounts affected and wheather it is to be debited or credited are as follows:

June 1 - Cash of P200,000 was received from Atty. Flores, the owner as his initial investment in his law firm.

Debit - Cash

Credit - Alex Flores, Capital

The receipt of cash by the company will increase its asset cash, therefore, cash is to be debited. Alex Flores, Capital is to be credited to record the increase in the capital account of the business.

2 - Purchase office supplies for cash, P5,000.

Debit - Office Supplies

Credit - Cash

The purchase of office supplies will increase the asset office supplies, so it is to be debited. Cash is to be credited because the payment will cause cash to decrease.

3 - Purchase office equipment worth P50,000. Paid P10,000 cash as down payment and signes a promissory note for the balance.

Debit - Office Equipmeng

Credit - Cash and Notes Payable

The asset office equipment will increase so it has to be debited. The office equipment was not paid in full so the company will have a liability for the unpaid balance. Since the liability is supported by a promissory note, the account to be credited is Notes Payable. Cash is also to be credited because the down payment will cause cash to decrease.

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Note: For easier understanding of the debit and credit entries, additional hints are given:

1. If there are only two accounts affected in the transaction, one is to be debited and the other one is to be credited. The two accounts cannot be both debited or credited. 2. Apply the concept of value received and value given away.

In the transaction, purchased office supplies for cash, the value received is Office Supplies, so it is account to be debited. The value given away is Cash, so it is the account to be credited.

Honestly, this note helps me a lot to identify weather it is debited and credited. Just remember, the give and take concept. What you give is what you'll credit and what you take is what you'll going to debit.