Essential Guide to Debit and Credit Rules in Accounting for Beginners

Account

Account is a record of transaction under a particular head. It records not only the number of transactions but also effect and direction. Let’s see format of the account.

Classification of account

1. Tradition approach or English approach of accounting
2. Modern approach or accounting equation approach or American approach   of accounting

Traditional Classification of Accounts

Accounts in accounting, accounts are categorized into three main types based on traditional principles. These classifications help in systematically recording and managing financial transactions.

1. Personal Accounts
2. Real Accounts
3. Nominal Accounts

Personal Accounts 

Personal account which connected to individual and entities, Accounts which relate to persons i.e., individuals, firms, companies’ debtors or creditor etc. for example – Mohan & co customers (Debtor), supplier (creditors), capital account and drawing account of proprietor, Bank Purpose to determine the balance due to or due from persons or organization.

Accounts that are used to record transactions related to individual persons, firms’ companies or other organisations. The guiding principle for these accounts is:

Golden Rule: "Debit the receiver, credit the giver."

1. Natural personal accounts – persons who are creation of God, in others words these belong to real living individual name for example - Ram account, Rahul Account,
2. Artificial personal accounts – account of corporate body or institutions which are recognised as persons in business dealings. For example – Account of limited company, account of club or cooperative society such as Google Ltd. Account, ICICI Bank Account, Tata Motors Account
3. Representative personal accounts – accounts which represent a certain person or group of persons. For instance, if rent is due to landlord outstanding rent account represent the amount of rent payable to the landlord. Representing personal accounts in accounting term   Salaries Payable Account, Outstanding Rent Account, Prepaid Insurance Account

Impersonal Account – Accounts which are not personal.

Real account 

The accounts of the transactions involving possession of the business that are not related to persons. Real account is connected to assets and properties, accounts which are related to tangible or intangible assets of firm excluding debtors for example – land, building, investment, stock, cash, goodwill, patent, trademark. They follow this rule: 

Golden Rule: "Debit what comes in, credit what goes out."

Types of Real Accounts

1. Tangible Real Accounts – These deal with physical assets that a business owns. Example: Cash Account, Machinery Account, Furniture Account, Land & Building Account Intangible
2. Intangible Real Accounts – These involve non-physical assets that still hold value. Example: Goodwill Account, Patents Account, Trademarks Account, Copyrights Account

Nominal accounts 

Nominal accounts connected to expense, losses, gain, income or revenue etc. are treated as nominal accounts for example – sales account, purchase account, interest paid account etc. net result of all nominal accounts is profit & loss which is transferred to capital account. The rule for these accounts is:

Golden Rule: "Debit all expenses and losses, credit all incomes and gains."

Types of Nominal Accounts

1. Expense Accounts - These accounts record costs incurred by the business. Example: Salary Expense Account, Rent Expense Account, Advertising Expense Account.
2. Income Accounts - These reflect the revenue earned by the business. Example: Interest Received Account, Discount Received Account, Commission Earned Account
3. Loss Accounts - These track financial losses. Example: Bad Debts Account, Loss on Sale of Assets Account 
4. Gain Accounts - These capture unexpected profits or windfalls. Example: Profit on Sale of Machinery, Gain from Foreign Exchange

Important tips for identifying the accounts 

If a prefix or suffix like outstanding, prepaid or accrued is added to a nominal account it become a personal account.

Nominal account	Personal account
Interest account	Outstanding interest account, Interest on advance account
Rent account	Outstanding rent, Prepaid rent
Salary account	Outstanding salary account, Prepaid salary account
Commission account	Outstanding commission account, Prepaid commission account

For example, State the nature of account and show which will be debited and which will be credited.

Transaction	Nature of account	Debit or Credit
Rent Received	Rent account – Nominal account	Credit
Rent Paid	Rent account – Nominal account	Debit
Interest Received	Interest account – Nominal account	Credit
Capital Introduced	Capital account	Credit
Discount Allowed	Discount allowed account – Nominal account	Debit
Discount Received	Discount received account – Nominal account	Credit
Machinery Purchased	Machinery account – Real account	Debit
Goods Purchased	Purchase account – Nominal account	Debit

Modern classification of Accounts 

1. Assets accounts – Accounts which are related to the economic resources of an enterprise. Resources owned by a business that are expected to bring future economic benefits. For example – land and building, plant & machinery, cash etc.
2. Liability accounts – Obligations or debts owed by a business to other entities or individuals. Liabilities can be short-term (due within one year) or long-term (due after more than one year). Are accounts of lenders, creditors for goods, outstanding expenses etc.
3. Capital accounts – Accounts of proprietors or partners who have invested amount in the business. 
4. Revenue accounts – Income generated from the core business activities, such as the sale of goods or services. It is also referred to as sales or turnover. Revenue account is also known as Accounts of income and gains. In addition of, earn interest received; commission received.
5. Expense accounts – Accounts of expenses on incurred in carrying the business, in simple term The costs incurred in the process of generating revenue. for example – purchase, wages, utilities, salaries, rent on building and cost of goods sold (COGS).

Rule of Debit & Credit (Modern Classification)

TYPES OF ACCOUNT	ACCOUNTS TO BE DEBITED	ACCOUNTS TO BE CREDITED
Asset account	Increase	Decrease
Liability account	Decrease	Increase
Capital account	Decrease	Increase
Revenue account	Decrease	Increase
Expense account	Increase	Decrease

In below diagram its helps for better understanding the rules of debit and credit as per modern classification or modern approach. 

FAQ's

What is the Basic Accounting Equation?

The accounting system is based on this equation: Assets = Liabilities + Equity 

This helps determine whether an account is debited or credited.

How Do Debits and Credits Affect the Trial Balance?

In a trial balance, the total of debit balances = total of credit balances. 

This helps verify that the books are mathematically correct.

What Happens If Debits Don’t Equal Credits?

If debits and credits don’t match, there’s likely an error in recording transactions, such as: 

• Wrong account used 
• Incorrect amount posted 
• Transaction omitted It must be investigated and corrected.

Is Debit Always a Good Thing and Credit a Bad Thing?

No — debit and credit are neutral accounting terms. 

• Debit could mean cash received (good) or an expense (costly). 
• Credit could mean sales (good) or money owed (liability). Their impact depends on the type of account they affect.

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