In the world of accounting, debit and credit are two of the major players. It's important to understand that debit and credit work against each other on the balance sheet and that both the debit and credit processes are required to make accounting function like it is supposed to. It is equivalent to how addition and subtraction make the world of mathematics go round.
Real Accounts
A real account is an account that is reported on the balance sheet, which is where the assets, liabilities and equities of the business owner are recorded. The reasons these types of accounts are labeled as "real" is because they exist on a continuous and permanent basis.
So if you buy office furniture for your business, the debit rule states that the furniture coming into the business affects the real accounts on the balance sheet. In this case, the furniture account of the company is debited because the rule states that you "debit what comes in."
In another example, if you were the company selling the furniture to Ms. Smith, then your balance sheet would look different. In this case, you as the furniture seller would credit your real accounts area of the balance sheet because the credit rule states that you credit "what goes out."
To determine whether a real account is a debit or credit, you have to stop and think about whether the item is coming into the company (debit) or going out of the company (credit).
Personal Accounts
Personal accounts are related to natural persons or representatives of the company or organization. To determine whether a personal account is debited or credited, you have to first determine whether the "person" is giving money to the organization or receiving (or benefiting) from the organization.
The rule states that you debit the receiver and credit the giver.
So if the business pays Mr. Smith $1,000 in cash, then the Mr. Smith account is debited and so is the cash account because that is where the cash was taken from to pay Mr. Smith.
If the business were buying furniture on credit from the ABC Furniture company, you would credit the ABC Furniture account because it is "giving" the furniture to the business.
Nominal Accounts
A nominal account is registered on the income sheet of the business, which is where the income and expenses of the business are recorded for a specific period of time.
There are two rules for nominal accounts. The first rule states that all expenses and losses to the company are recorded on the income sheet as debits. The second rule states that all income and gains to the business are recorded as credits on the income sheet.
Using these rules, if the company pays its employees for work performed, the cash account, which is the real account, and the wages account, which is the nominal account, are both debited as losses or expenses to the company.
On the other hand, if the company receives a commission payment from a company for selling its goods, then the payment is recorded as a credit to the bank account, which is the personal account of the business, and to the commission account, which is the nominal account of the business.
Two Effects
Another primary rule of accounting is that there are always two accounts effected by a transaction. This means that if one account is credited then another account has to be debited. This is what has to happen to keep the numbers balanced.
So let's say that your company is purchasing office furniture from the ABC Furniture Company on credit (rather than paying in cash). Since you are buying furniture for the company, it is coming into the company and therefore is treated as a debit to the goods account. A credit is recorded to the ABC Furniture Company account because you credit the giver.
Debited and Credited Accounts
There are some cases where an account is credited but then in another scenario the account would be debited. For example, a cash account would be credited when a cash purchase is made, but the same cash account would be debited if a cash sale is made.
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