Rule No. 1: Assets and expenses are debit in nature, which means that an increase in assets and / or expenses leads to a debit, while a decrease in assets and / or expenses leads to a credit. Liabilities, equity, and income are credit in nature, meaning that an increase in liabilities, equity, and / or income leads to credit, while a decrease in liabilities, equity, and / or income leads to credit. or the income leads to a debit.

Rule No. 2: debits must equal credits

Rule No. 3: Income – Expenses = Profit (if positive) or Loss (if negative)

Rule No. 4: Gain is added while Loss is deducted from the owner’s equity.

Rule No. 5: Assets = Liabilities + Owners’ Equity

Rule No. 6:

Increase in debits = Increase in credits

Decrease in debits = Decrease in credits

Increase in debits = Decrease in debits

Credit increase = Credit decrease

Rule No. 7: Every transaction in accounting affects AT LEAST one debit and one credit account.

Let’s understand the above rules by analyzing certain transactions:

Transaction analysis: Affected account (accounting element – Increase / Decrease – Debit / Credit)

1. The owner contributed cash to the business.

Transaction analysis: Cash (Assets – Increase – Debt) and Capital (Owners’ Equity – Increase – Credit)

2. Buy shares on credit from a supplier.

Transaction analysis: Shares (Asset – Increase – Debit) and Creditor (Liability – Increase – Credit)

3. Sold property for cash.

Transaction analysis: Cash (Asset – Increase – Debit) and Sales (Income – Increase – Credit)

and Stock (Asset – Decrease – Credit) and Cost of goods sold (Expenses – Increase – Debit)

4. Paid to the supplier.

Transaction analysis: Cash (Asset – Decrease – Credit) and Creditor (liability – Decrease – Debt)

5. Machinery purchased for cash.

Transaction analysis: Cash (Asset – Decrease – Credit) and Machinery (Asset – Increase – Debit)