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Principles or Rules of Debit and Credit

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Need for the Rules or Principles of Accounting

Let us recollect what we were going through

What is the basic purpose of accounting??

Derivation of Information

What is targeted to be achieved through the accounting process?

Collecting all the information relating to an element at a single place.

What were we trying to do?

To achieve the target i.e. to collect all the information relating to an element at a single place, we need a system of accounting. We have been learning the steps in constructing that system of accounting.

What did we learn till now?

We learnt about three concepts of accounting, "Money Measurement Concept", "Separate Entity Concept" and "Dual Entity Concept". We also learnt about elements, and their nature.

What next?
On our journey to achieve the target i.e. constructing the accounting system that provides us all the information relating to an element at a single place, we next learn the rules/principles of debit and credit. After analysing a transaction and deciding on the two elements affected by the transaction and the nature of the elements, we decide which element is to be debited and which is to be credited by applying the rules of debit and credit.

Debit and Credit

Debit and Credit are two actions of opposing nature that are relevant to the process of accounting. They are as fundamental to accounting as addition (+) and subtraction () are to mathematics. It would not be appropriate to apply this mathematical analogy in all cases as it would give a distorted meaning. Thus, it would not be appropriate to consider debit to be an equivalent of addition and credit to be an equivalent of subtraction. You just need to understand that debit and credit are two actions that are opposite in nature. An element (account) that is effected by an accounting transaction is either debited or credited (with an amount that is reflected in the transaction) depending on the nature of the account and the rule applicable to it. A purchase of Furniture worth Rs. 10,000 for Cash. This transaction would result in i. Furniture a/c being debited by an amount of Rs. 10,000 and ii. Cash a/c being credited by a similar amount. A payment of Rs. 5,000 received from Mr. Narayan by Cheque. This transaction would result in i. Mr. Narayan a/c being credited to the extent of Rs. 5,000 and ii. The Bank a/c being debited with a similar amount.

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7/16/2011 7:18 PM

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Rules/Principles of Debit and Credit

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7/16/2011 7:18 PM