CHARGE AND CREDIT RULES: WHAT IT CONSISTS OF AND EXAMPLES - DUDAS - 2025

The debit and credit rules are the guidelines that handle the use of debits and credits in an accounting entry. By following these rules, you can ensure technically correct ledger entries, eliminating the risk of having an unbalanced balance sheet.

After an event is recognized as a business transaction, it is analyzed to determine the effects of increase or decrease on the assets, liabilities, stockholders' equity, dividends, income or expenses of the business.

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However, the concept of increase or decrease is not used in accounting. The words charge or "debit" and credit or "credit" are used instead of increasing or decreasing. The meaning of debit and credit will change depending on the type of account.

When posting these transactions, we record the numbers in two accounts, where the debit column is on the left and the credit column is on the right.

Debit simply means left side and credit means right side. The accounting equation Assets = Liabilities + Equity must always be in balance. Thus, the charge and credit rules enforce this precept.

What is the charge and credit rule?

In each business transaction that is recorded, the total amount of the charges must equal the total amount of the credits. When an account is debited for $ 100, another account must be credited for $ 100.

Fees and credits are the opposite sides of a journal entry. The rules that govern the use of charges and credits are the following:

Rule 1

All accounts that normally contain a debit balance will increase in amount when a charge or debit is added (left column), and will decrease when a credit or credit is added (right column).

The types of account to which this rule applies are expenses, assets, and dividends.

Rule 2

All accounts that normally contain a credit balance will increase in amount when a credit or credit is added (right column), and will decrease when a charge or debit is added (left column).

The types of account to which this rule applies are liabilities, income, and equity.

Rule 3

Counter accounts reduce the balances of the accounts they are paired with. For example, this means that a counter account paired with an asset account behaves as if it were a liability account.

Rule 4

The total amount of charges or debits must equal the total number of credits or credits in a transaction.

If not, a transaction is said to be unbalanced, and the financial statements from which a transaction is constructed will also be inherently incorrect.

An accounting software package will mark any journal entries that are out of balance.

Use of the charge and credit

The charges and credit totals for any transaction should always be equal to each other, so that an accounting transaction is always said to be "in balance."

If a transaction were not in equilibrium, it would not be possible to create the financial statements. Therefore, the use of debits and credits in the two-column transaction record format is the most essential of all controls over accounting accuracy.

There may be some confusion about the inherent meaning of a charge or credit. For example, if a cash account is debited, this means that the amount of cash available increases.

However, if an accounts payable account is charged, this means that the amount owed on accounts payable decreases.

Impact on accounts

Charges and credits have different impacts on different types of accounts, which are:

- Asset accounts: A charge increases the balance and a credit decreases the balance.

- Liability accounts: A charge decreases the balance and a credit increases the balance.

- Equity account: A charge decreases the balance and a credit increases the balance.

If a transaction is created with a debit and a credit, an asset is generally increased at the same time as a liability or equity account is increased, or vice versa. There are some exceptions, such as increasing one asset account and decreasing another asset account.

For accounts that appear in the income statement, these additional rules apply:

- Income accounts: A charge decreases the balance and a credit increases the balance.

- Expense accounts: A charge increases the balance and a credit decreases the balance.

- Profit account. A charge decreases the balance and a credit increases the balance.

- Loss accounts. A charge increases the balance and a credit decreases the balance.

Examples

Below is the use of charges and credits in the most common business transactions:

- Cash sale: Charge the cash account - Pay the income account.

- Sale on credit: Charge the accounts receivable account - Pay the income account.

- Receive cash for the payment of an account receivable: Charge the cash account - Pay the accounts receivable account.

- Buy supplies from the supplier with cash: Charge the supplies expense account - Pay the cash account.

- Buy supplies from the supplier on credit: Charge the supplies expense account - Pay the accounts payable account.

- Pay employees: Charge salary expenses and payroll tax accounts - Pay the account in cash.

- Buy supplier inventory with cash: Load inventory account - Credit account with cash.

- Buy inventory from supplier on credit: Charge the inventory account - Credit the accounts payable account.

- Obtain a loan: Charge the cash account - Pay the loan account payable.

- Repay a loan: Charge the loan account payable - Pay the cash account.

ABC Corporation

ABC Corporation sells a product to a customer for $ 1,000 in cash. This results in income of $ 1,000 and cash of $ 1,000. ABC must record an increase in the cash account (asset) with a charge, and also an increase in the income account with a credit. The seat is:

ABC Corporation also buys a machine on credit for $ 15,000. This results in an addition to the Machinery fixed asset account with a charge, and an increase in the accounts payable (liability) account with a credit. The seat is:

References

1. Steven Bragg (2018). Debit and credit rules. Accounting Tools. Taken from: accountingtools.com.
2. Steven Bragg (2018). Debits and credits. Accounting Tools. Taken from: accountingtools.com.
3. OER Services (2018). General Rules for Debits and Credits. Taken from: courses.lumenlearning.com.
4. Accounting for management (2018). Rules of debit and credit. Taken from: accountingformanagement.org.
5. Accounting-Management (2018). Rules Of Journalizing Or Rules Of Debit And Credit. Taken from: accountlearning.blogspot.com.