BOOKKEEPING COURSE: THE DEBIT AND CREDIT

RULES
HE DEBIT AND CREDIT RULES

Type of
To Debit the Account
Account
When the person whose
1
in whose name the
Personal
.
account is kept is in debt
to us
2
Real
.

When the account

received money/the
equivalent

Any account that ends

3 Profit
with the words 'Expense
. and Loss
Accounts'.

To Credit the Account

When the person in
whose name the account
is kept is in credit with
us
When the account gives
us money/the equivalent
Any account that ends
with the words 'Revenue
Account'

Comprehensive Example:
1. 1.1.xx
123).
2. 2.1.xx
3. 3.1.xx
4. 4.1.xx
5. 5,1,xx

We bought goods from Waterman for an overall sum of $ 1,000 (Invoice No.
We
We
We
We

sold part of the goods for $ 600 cash (Receipt No. 1950)
paid $ 200 cash for electricity expenses (Expense Voucher 001).
bought a store from Max for $ 20,000 (Invoice No. 953).
rented the store out for $ 700 cash (Invoice No.001)

We will practice making the bookkeeping records that are the subject of the above table
(Comment: In the first part of the solution, the records will be presented in the form of a
T account, and they will be presented textually in the second part. This will be explained
more fully later on.

T ACCOUNTS

Goods
Debit
(1) 1,000

Account
Credit
600 (2)

Waterma
Account
n
Debit

Credit
1,000 (1)

Cash
Debit

Credit

(2) 600
(5) 700
Store

Electricity
nses Account
Expe

Account

Debit

200 (3)

(3) 200

Account

Debit

Credit

Max Account

Credit

Debit

(4) 20,000

Store Ren

Credit
20,000 (4)

tal
Account

Debit

Credit
700 (5)

Debit
(1) Debit Goods Account
1,000
Credit: Waterman Account
1.1.xx Purchase on credit Invoice 123
(2) Debit: Cash Account
Credit: Goods Account
2.1.xx Cash Sale, Receipt 1950
(3) Debit: Electricity Expenses
Credit: Cash
3.1.xx Cash payment, Expenses
Voucher 001
(4) Debit: Store Account
Credit: Max Account
4.1.xx Purchase of Store, Account
953
(5) Debit: Cash
Credit: Income from Rental
5.1.xx Cash Rental Account 001

Credit
1,000

600
600
200
200

20,000
20,000
700
700
22,500 22,500

Let's go over the entries together:

Event 1:
The Goods Account (a real account) is debited - because an account was received (Rule 1

in the table).
The Waterman Account, (a personal account) is credited - as it is due to receive money
(Rule 2 in the table).

Event 2:
The Cash Account (a real account) is debited - because the cash was received (Rule 2 in
the table)
The Goods Account (a real account) is credited - because the warehouse issued goods
(Rule 2 in the table).

Event 3:
The Electricity Expenses - (A profit and loss account) is debited - as every expense
account is debited (Rule 3 in the table).

Event 4:
The Store Account (a real account) is debited - the transaction received a monetary value
(Rule 2 in the table).
The Max Account (a personal account) is credited - according to Rules 1 or 2.

Event 5:
The Income from the Rental Account (a profit and loss account) is a credit - as all receipts
are a credit (Rule 3 in the table).
The Cash Account is debited - according to Rule 2 in the table.
Comment: It is easy to remember that every expense account is debited (the expense is
a negative matter from an economic point of view and it is a debt of the
business).Similarly, all receipts are a credit (a credit is something positive from an
economic point of view and it is to the credit of the business). An additional stage that
should be emphasized is that the first part (the T - Accounts) in fact serve us as a draft
for the purpose of illustrating the records. In actual fact, the bookkeeping records are
only inwords, the professional term for each record being a "Journal Entry: (or a "journal
voucher").

The Structure of the Nominal ledger (General Ledger)

At the beginning of the tutorial, it was pointed out that an account in the Nominal ledger
looks like the letter T. In fact, there are additional auxiliary data in the account Let us
assume that January 1, xx, we received a loan in cash from Max in an amount of $10,000.
The Journal Entry will look as follows: (let us assume that it concerns a voucher for which
the serial number in the journal is xx):
xx Debit: Cash 10,000

Credit: Max 10,000

1.1.xx - Loan from Max, Receipt 013.
The Journal Entry will be transferred to 2 accounts in the Nominal Ledger as follows:

CASH ACCOUNT
Debit

Credit
Or
de
r
No
.

Con
tra
Acc
oun
t

Dat
e
Rec
ord
ed

Va
lu
De
Re
e
tail $
f.
Da
s
te

Loa
n
R.
10,
28.2. 1.1
fro
xx Max
01
00
xx .xx
m
3
0
ma
x

MAX ACCOUNT
Debit

Credit
Or
de
r
No
.

Con
tra
Acc
oun
t

Dat
e
Rec
ord
ed

Va
lu
De
Re
e
tail $
f.
Da
s
te

xx

Cas
R.
10,
Cas 28.2. 1.1
h
01
00
h
xx .xx
Loa
3
0
n

Let us analyze, for example, the "Cash" account. As you see in addition to the sum of $
10,000 debited, there are other auxiliary data as follows:
1. Order Number-In our example, order xx. This is an important detail as the
original document (Receipt 013) is filed under Journal Order Number xx
2. Contra Account This is the account that assisted, in the Journal entry to balance
the record. If we go back to the journal entry, you will see that the contra account
for the Cash is "*** Account". Therefore, in this column, we record "*** Account".
3. Date recorded The date on which the nominal ledger was updated. In the
present instance, despite the fact that the event occurred on 1.1.xx, it was
recorded in the nominal ledger only on 28.2.xx.
4. Value Date The date of the original document (in our case, the receipt was
issued on 1.1.xx).
5. Reference This is the number of the original document (Receipt, invoice, etc.)
6. Details A short verbal description, similar in character to the details that appear
in the Journal entry.

Account - Flow and Balance

Let us go back a little, to the example that was explained at the beginning of the tutorial,
The Cash Account (in the Nominal Ledger) looks like this:
Cash
Debit

Accounts
Credit

600
700

200

We will now learn two new concepts - Flow and Balance

1. Debit Flow This is all the records on the debit side of the account (in the example
before us $ 1,300) (600 + 700).
2. Credit Flow This is all the records on the credit side of the account (in the
example before us $ 200).
3. Debit Balance The difference between the debit transactions and the credit
transactions (when the debit transactions exceed the credit transactions).
4. Credit Balance The difference between the credit transactions and the debit
transactions (when the credit transactions exceed the debit transactions).

In our example, there is a "Debit Balance" in the Cash Account (the total debit
transactions exceed the credit transactions) of $ 1,100 (1300 - 200).
Before we go on to a comprehensive example, we will change the reference to the
"Goods Account" a little. Until now, to keep matters simple, we have referred to the
Goods Account as to a real account (the Warehouse Account), when on purchasing goods,
we have debited the Goods Account (the warehouse 'received") and on selling goods, we
have credited the Goods Account (the warehouse 'gave'). In fact, the reference to goods
is different as the purchase prices ( 'in' to the warehouse) is normally lower that the price
on leaving the warehouse (sale price).
The correct reference to the Goods Account is as to a normal profit and loss account, as
for this purpose, 2 temporary bookkeeping accounts are opened: the first "Goods
Purchased" (an expense - and therefore the account will normally be debited), the second
"Goods Sold" (income - and therefore the account will normally be credited). A simple
example appears below (the example ignores Value added tax):
1.1.xx We bought goods for cash for a sum of $ 1,000.
5.1.xx All the goods were sold for $ 1,200 cash.
The journal entries will be as follows:

Debit

Credit

1. Debit: Purchase of goods

Credit: Cash
Purchase of Goods, Invoice .....

1,000

2. Debit: Cash
Credit: Sale of Goods
Cash sale. Receipt.....

1,200

1,000

1,200

Comprehensive Example
We will go on now to a comprehensive example that we will use until the end of this
tutorial (in the example, we will try to imagine that your name is Miles and that you are
the owner of a new business).
Business data

1.1.xx
We opened a new business in which we invested $ 10,000 dollars in cash.
2.1.xx
We transferred $ 4,000 in cash to open a current bank account at the City Central Bank.
3.1.xx
We bought office furnishings in the sum of $ 1,000 in cash.
4.1.xx
We paid $ 600 in cash for office rental.
5.1.xx
We bough a telephone with a check for $ 300.
30.1.xx
We paid electricity expenses (by check) in an amount of $ 400.
1.2.xx
We bought goods with a check for $ 1,200 (ignore the Value Added Tax).
2.2.xx
We sold part of the goods for $ 1,000; the money received was deposited directly into the bank account.
3.2.xx
We bought more goods with a check for $ 3,000.
4.2.xx
We sold all the remaining goods for $ 5,000. The money received was deposited directly into the bank account.
28.2.xx
The bank credited our account with interest in the amount of $ 100.

Pay attention to the journal entries while referring to the general debit/credit table at the beginning of the
tutorial.

JOURNAL ENTRIES

Journa Date
l No.

1.

2.

Cash
Owners Equity
1.1.x
Owners
x
Investment in
Cash
Current account at
2.1.x City Central
Cash Cash
x
Deposit

3.

Fixed assets
3.1.x Cash
x
Purchase of
furniture for

Debit

Credit

10,000
10,000

4,000
4,000

1,000

Account
Type

Real
Personal*

Debit
and
Credit
Rule No.

2
1

Real/Personal
1-2
**
2
Real

1,000

Real
Real

2
2

4.

Expenses for office

rental
600
4.1.x
Cash
x
Payment of rent
in cash

600

Temporary
Real

3
2

5.

Fixed assets
City Central current 300
5.1.x
account
x
Purchase of
telephone

300

Real
2
Real/Personal 1-2

6.

Electricity expenses
City Central current 400
30.1.
account
xx
Payment of
electricity

400

7.

Purchase of goods
City Central current 1,200
1.2.x
account
x
Purchase of
goods

1,200

Temporary
3
Real/Personal 1-2

8.

City Central current

1,000
3.2.x account
x
Sales of goods
Sale of goods

1,000

Real/Personal 3
Temporary
1-2

3.2.x Purchase of goods 3,000

x
City Central current
account

3,000

Temporary
3
Real/Personal 1-2

9.

Temporary
3
Real/Personal 1-2

Purchase of
goods

10.

City Central current

5,000
4.2.x account
x
Sale of goods
Sale of goods

5,000

Real/Personal 1-2
Temporary
3

11.

City Central current

account
Income from
100
28.2. interest
xx
Income from
interest, City and
Central Current
Account

100

Real/Personal 1-2
Temporary
3

26,600

26,600

Owners Equity Account

A normal personal account that is in credit as the owner of the business (Miles) "is
credited as eligible" to receive from the business (refer to the business as a separate
body) his basic investment in the sum of $ 10,000. To differentiate between the external
creditors of the business (suppliers, lenders and so forth), and the owner of the business,
the prefix "Owners Equity" appears at the beginning of the name of the account.
Remember that from the point of view of the business, the business owners eligibility to
be credited with $ 10,000 is not as important as the financial eligibility of a normal
supplier to receive $ 10,000. In the current cash management of the business, the
eligibility of the owner of the business can be almost completely ignored as this
obligation is not immediately repayable.
** Current Account
The account can be referred to as both a real account (like Cash) or as a personal
account.
1. Real account
Imagine for a moment that the money in the bank is in a metal cash box that belongs to
you. On depositing money, the box "received" money (received - debit) while when
drawing a check the box "gave" money (gave - credit)
2. Personal Account
In making a deposit in the current account it is as though the bank manager (personal)
owes you money. When you draw money out of the account, the bank manager owes you
less than he did a moment before you made the withdrawal. (A reduction of a debit is
expressed in bookkeeping as a credit transaction).

Structure of the Nominal Ledger (General ledger)

Comment: For the sake of brevity, only the following details appear on each account
page.
1. The journal entry number.
2. Name of the contra-account.
3. Description of the transaction.
Cash

Accounts

Debit

Credit

1. Owners Equity Investment

10,000 2. City Central current account Deposit

4,000

3. Fixed assets - Furnishing

1,000

4. Rental expenses - Rental

600
____________

_________

5,600

10,000

ITY ACCOUNT
OWNERS EQU
Debit

Credit
1. Cash - Owners Investments

CITY CENTRAL

10,000

CURRENT ACCOUNT

Debit

Credit

2. Cash - Deposit

4,000

8. Sale of goods - Sales

1,000

10. Sale of goods - Sales

5,000

11. Income from interest - Current

interest

5. Fixed Assets - Telephone

300

6. Electricity expenses - Expenses

400

7. Purchase of goods - Purchases

1,200

100 9. Purchase of goods - Purchases

3,000
_________

_________

4,900

10,100

FIXED ASSETS
Debit
3. Cash - Furniture Purchase
5. City and Central current account Telephone

ACCOUNT
Credit

1,000
300
_________
1,300

OFFICE RENTAL

EXPENSES ACCOUNT

Debit

Credit

4. Cash - Rent

600

PENSES ACCOUNT
ELECTRICITY EX
Debit

Credit

6. City Central current account Payment of

expenses

40
0

PURCHASE OF

GOODS ACCOUNT

Debit

Credit

7. City Central account-Goods

purchase

1,200

9. City Central account -Goods

purchase

3,000
_________
4,200

SALE OF

GOODS ACCOUNT

Debit

Credit
8. City Central current account Sales

1,000

10. City Central current account Sales

5,000
_________
6,000

INCOME FROM
Debit

INTEREST ACCOUNT
Credit
11. City Central current account Income
from interest

Example of Petty Cash Accounting

10
0

A company sets up a petty cash fund and initially funds it with $300. The entry is:
Debit
Petty cash

Credit

$300

Cash

$300

The petty cash custodian lets the cash balance in the petty cash box decline to $20 before
applying for replenishment. The cashier issues a replenishment check for $280, The entry is:
Debit
Petty cash

Credit

$280

Cash

$280

The cashier records the expenses associated with the petty cash receipts that were submitted.
The entry is:
Debit
Office expenses

Credit

$280

Petty cash

Real Accounts

$280

Personal Accounts

Debit

what comes in

The receiver

Credit

what goes out

The giver

Nominal Accounts
Expenses and Losses
Income and gains