Rules of Debit and Credit

Rules of Debit and Credit

Financial transactions under double entry system have double effect because they involve at least two accounts. One is credited and the other is debited. The debiting and crediting has to be done on basis of laid down rules.

Accounts are often classified in terms of assets, liabilities, income, and expenses (Larson & Jensen, 2005). Expenses are further classified thus: capital expenses and revenue expenses. Assets are classified in terms of their liquidity. They are properties and possessions that an organization has that can be liquidated within a year or after a year. The properties and possessions can have physical existence or no physical existence. They can be tangible or intangible. Liabilities are a business enterprise debts and obligations. A business enterprise therefore has an obligation to pay its debts on a future date. Assets are created when a venture invests its capital. Income is the value of goods and services that a venture charges from its customers. It is the returns received from the resources invested in a business. Expenses are the costs an enterprise incurs in its endeavors to earn revenue. Basically, profit is the excess of income over expenses in a specific period. Loss on the other hand, is the excess of expenses over income (Larson & Jensen, 2005). Capital expenditures have a life of more than one year. They create an asset used in generating future income. A typical example of capital expenditure is a machinery or furniture purchased. Revenue expenditures are day-to-day expenses with instantaneous benefits like employee salary or rent paid on a leased building. Any account: be it an asset, a liability, income, or an expense that provides some sort of benefit to a business venture is debit (Larson & Jensen, 2005). However, any undertaking that compels a business enterprise to return benefit in future is considered a credit.

Purchase of an asset transfers benefit to that particular account. Assets purchased must therefore be debited. Any increase in assets has to be debited. When an asset is disposed off to accrue cash, the assets account decreases while the cash account benefits. The assets account in this respect is credited (Pieters & Dempsey, 2009). Thus far, the second rule of debit and credit for assets avers a decrease in asset is credit.

With respect to debit and credit for liabilities, liabilities are an exact opposite of assets. Liabilities transfer value to a business venture. They also compel businesses to return a benefit. Because creation of liabilities transfers benefit to a business venture's liability account, liabilities have to be credited. Increase in liability must be credited. After a venture has repaid its liabilities, its liability accounts benefits. This explains why decrease in liability is treated as a debit (Pieters & Dempsey, 2009).