Debit & Credit Rules of Accounting

Debit and credit are two accounting concepts that balance each other, similar to addition and subtraction. Although they are commonly used to describe consumer options at the checkout counter, debit and credit are actual industry terms in the field of accounting. Three types of accounts are ruled by the principles of credit and debit: real accounts, personal accounts and nominal accounts.

Credit and Debit Introductory Rules

A simple rule governs most credit and debit transactions: with the exception of nominal accounts, credit describes assets going out; debit describes assets coming in. Every accounting transaction is a result of either credit or debit, and the degree to which one occurs equally affects the degree to which the other will occur. Whether an accounting transaction will be considered credit or debit is contingent on the kind of account in question and the rules governing that particular account. Debit transactions increase expenses, dividends and assets, and decrease revenues, equity and liability. Credit transactions perform the opposite actions; they increase revenues, equity and liability, and decrease expenses dividends and assets.

Real Account Rules

Business Dictionary describes real accounts as asset, liability, reserve and capital accounts that appear on the balance sheet of a business. Real account balances are permanent; at the end of the accounting period they are transferred into the next accounting period. A real account transaction is considered debit if the transaction is bringing assets into the business; the transaction is considered credit if the assets are going out of the business. For example, if Jane buys steaks to cook at her restaurant, this is considered a debit transaction. When she cooks those steaks and sells them to hungry customers, the transaction will be considered a credit.

Personal Account Rules

Business Dictionary says personal accounts are ledger accounts where the individuals performing the transactions are recorded as debtors or creditors. The debtor is the individual, business or organization that receives the assets. The creditor is the individual, business or organization that pays the assets. For example, if Bill buys a magazine from a newsstand, Bill is being debited the magazine. If he were to return the magazine, the newsstand would credit his payment.

Nominal Account Rules

Nominal accounts, also known as temporary accounts, begin all accounting periods containing a zero balance, accrue a balance during the statement period and then close out the statement period with a zero balance. Nominal accounts operate under the reverse debit/credit rules of real and personal accounts; losses (costs/expenses) are considered debit transactions, while gains (income/assets) are considered credit transactions.