The rules of debit and credit are fundamental principles in accounting that govern how transactions are recorded. These rules ensure that accounting entries maintain the fundamental accounting equation (Assets = Liabilities + Equity) and adhere to the principles of double-entry bookkeeping.

The rules are as follows…

1. The Accounting Equation – Every transaction affects at least two accounts and must maintain the balance of the accounting equation.

2. Debit (Dr.) and Credit (Cr.) – For each transaction, there must be at least one debit entry and one credit entry. The total debits must equal the total credits.

3. Debit and Credit Accounts – Different types of accounts are affected by debits and credits in specific ways…

• Assets – Increase with debits, decrease with credits.
• Liabilities – Increase with credits, decrease with debits.
• Equity – Increases with credits (revenues, contributions, owner’s equity), and decreases with debits (expenses, distributions, withdrawals).
• Revenue – Increase with credits, decrease with debits.
• Expense – Increase with debits, decrease with credits.

Here’s an example of a journal entry with explanations…

Transaction – The company sells merchandise for cash.

Analysis – This transaction involves two accounts, Cash (an asset account) and Sales Revenue (a revenue account).

1. Cash Account
– Since cash is received, it increases, following the rule that assets increase with debits.
– Therefore, we debit the Cash account.

2. Sales Revenue Account
– Since sales revenue is earned, it increases, following the rule that revenues increase with credits.
– Therefore, we credit the Sales Revenue account.

Journal Entry
– Debit (Dr.) Cash account for the amount received.
– Credit (Cr.) Sales Revenue accounts for the amount earned.

Example
– Debit Cash account for $1,000 (reflecting the cash received from the sale).
– Credit Sales Revenue accounts for $1,000 (reflecting the revenue earned from the sale).

This journal entry ensures that the accounting equation remains balanced…
– Assets (Cash) increase by $1,000 (debit).
– Equity (Sales Revenue) increases by $1,000 (credit).

This transaction is recorded in the general ledger using these journal entries, providing an accurate record of the company’s financial activities.