Golden Rules of Debit and Credit | Find Best MBA Note

Want to learn the accounting rules of debit and credit? If yes, then this article is for you.

Here you will find the basic accounting rules of debit and credit and details of 5 major account heads used in accounting for any transaction.  

This article is written in easy language, so you can learn the concept quickly. 

State the Rules of Debit and Credit of Capital

The rules of debit and credit are an important part of our accounting system.  These rules are used to record business transactions. In the accounting software, all bookkeepers/accountants follow these rules and record all day-to-day operations of their company. 

Rules of Debit and Credit

The rules of debit and credit are very important for recording. We need to understand these rules to record entries. 

What are the 5 Rules of Debit and Credit?

The debit credit rules are classified into the following accounts:-

• Assets

• Expense

• Liability

• Revenue

• Capital / Owner Equity

Debit Credit Rules Chart

A Chart of accounts is the basis of accounting software, “A chart of accounts is a ‘Chart” of our business financial activity accounts. This is the structure of the various financial account organizations that provide an overview of all financial transactions. Rules of Debit and Credit are more understandable with the help of a chart of accounts.

Debit Credit Rules

Assets Account

The first head of the debit credit rules chart is assets, which are the resources owned by an individual or company converted into cash:-

• Current Assets. Current assets are in the form of cash, and bank balances in this category are accounts receivable, marketable securities, inventory/stock, and bonds.

• Fixed Assets. Fixed assets are vehicles, goodwill, land & building, machinery, and computer software.

Expense Accounts

Expenses are the second head of the debit credit chart. The cost that occurs during a specified accounting period to generate revenue is also two categories:-

• Direct Expenses. These costs are customs duties such as import, inward shipping, loading and unloading, inward freight, raw material purchases, warehousing costs, and rent costs.

• Indirect Expense. Indirect expenses are bank charges, discounts allowed, depreciation expenses, staff salaries, and rent expenses.

Liability Accounts

The critical head of the debit credit rules chart is the liability account. The financial obligations or debts of a company that arises during the operation of a business or any other kind of borrowing from an investor (individual or bank) to improve a business paid in the short or long term, main types of debt:-

• Current liabilities. This includes bills to be paid, income taxes to be paid, salaries to be paid, bank overdrafts to be paid, interest to be paid, various creditors, provisions, etc.

• Long-term liabilities. Corporate bonds, capital leases, deferred tax liabilities, long-term bills payable, and mortgages.

• Contingent liabilities. These Liabilities Include lawsuits, breach of contract, and product warranties.

Revenue/ Sales Accounts 

Revenue/sales accounts are called sales accounts. Include the selling of goods/ services.

Capital / Owner Equity Accounts

These account for an ownership interest in a business as stockholder equity or owner’s equity.

Conclusion

The rules of debit and credit are the most important in accounting. All transactions are being made based on these rules. So, understanding these rules is very necessary for all students, especially business studies students.

Read More: MBA Lectures Notes

FAQ

What is Accounting Definition?

Accounting is a systematic process in which we record all information about a company.

Describe What is Accounting Process?

The following are the essentials for the accounting process:-

• Identifying. One is to determine the business of buying and selling. This is called the trade and the date on which those trades are executed.

• Recording. We record all transactions by date.

• Measuring. After recording, we measure how much money we have and how much money we make. We also measure what we buy and what we sell.

• Classifying. During this process, we classify the transactions. Keep separate accounts for these transactions.

• Verifying. This process validates all these transactions. The number of items sold and received.

• Summarizing In the process, we prepared a summary and how much money did the deal receive?

• Interpreting In this process, we determine as a result of buying and selling how the business has affected the business, is the business driven by profits or losses?

• Communicating Information In this process, we communicate all the above information to the public

What is the importance of accounting for business success?

The role of accounting in business is very important because it is a business language. To communicate with a person, one must understand his language. Likewise, to learn business, one must understand accounting.