In order to record the journal entries, one must know the rules of debit and credit. First of all we should know the meaning of debit and credit. In journalizing, debit simply means the act of recording entry on left side of an account whereas credit means recording the entry on right side. Therefore left side is the debit side whereas right side is the credit side of any account. In case of double-entry bookkeeping, every transaction affects at least two accounts i.e. if one is debited other must be credited. Following are some of the important rules of debit and credit illustrated on the basis of nature of item or account.
- All those assets which are purchased by an organization are debited.
- All those assets which are sold by an organization are credited.
For example: Goods purchased for Rs. 2500.
Goods sold for Rs. 2000.
Note: In accounting, goods purchased are represented by purchases whereas goods sold are represented by sales.
- An increase in liabilities will be credited.
- Any decrease in liabilities will be debited.
For example: David purchased goods on credit for Rs. 3000
David paid for the purchase of goods on credit for Rs. 3000
- If there is increase in the capital then it will be credited.
- If there is decrease in the capital then it will be debited.
For example: Vikram started business with Rs. 50000
Vikram drawn Rs. 10000 from the business for personal use.
- An increase in expenses will be debited.
For example: Paid rent expense for the month in cash Rs. 6000
When a company sells goods to customers and the customers return goods to the company because of any defect, then such goods are sales return. Sales return is always debited.
For example: George sold goods for Rs. 8000 but the goods were returned back by the customer.
Sometimes, company purchase goods which are not according to their specification or contain some defects due to which company returns the goods to the seller. Such goods are called purchases return and they are always credited.
For example: Steve purchased goods for Rs. 7000 but returned them back because they were damaged.
Whenever the company earns profit, the amount of profit is always recorded on the credit side of journal.
Whenever a company incurs loss, the amount of loss is always recorded on the debit side of journal.