Briefly explain the rules of debits and credits as they relate to assets, liabilities, equity, revenue,...

Briefly explain the rules of debits and credits as they relate to assets, liabilities, equity, revenue, and expenses.

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Expert Solution

Before understanding the rules you should know that there are three kinds of Accounts/Ledgers namely:

1. Real Accounts: Include Tangible & Intangible Assets like Fixed Assets, Investment, Cash, etc [for ONLY ASSETS]
2. Personal Accounts: Include all Assets & Liabilities that are PERSONAL in nature like Accounts receivables/Payables, Banks, Owner, etc. [ for ASSETS, LIABILITIES & EQUITY]
3. Nominal Accounts: Include all income/gains and expenses/losses [for REVENUES & EXPENSES]

NOW

There are basically three main rules that are conceptually considered for debiting and crediting an account.

1. First rule is regarding Real Account [ONLY some ASSETS]

The Rule says: Debit what comes in, Credit what goes out.
so like if Cash is coming in, it is DEBITED. If Fixed Asset is sold( it is going) it is credited.

2. Second Rule is regarding Personal Account [Other Assets, Liabilities and Equity]

The Rule says: Debit the receiver, Credit the Giver

So when inventory is purchased on credit, Supplier becomes 'giver', and hence Accounts payable is credited.

3. Third Rule is regarding Nomincal Account [Income/Gain and Losses/Expenses]

The Rule says: Debit all expenses and losses, Credit all income and gains.

Like when asset is sold at a profit, such profit is therefore CREDITED, likewise, Losses on sale are DEBITED.
Also, every expense is always DEBITED, Revenues/Incomes are always CREDITED.

ekkarill92 answered 1 year ago

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