University of Libya BETC

Rules of Debit and Credit

Debit and Credit •
Debit and Credit are two Latin words and as such it is difficult to say what do these •
mean. But we can
develop an understanding as to what does these terms stand for. •
Debit •
It signifies the receiving of benefit. In simple words it is the left hand side. DEBIT •
is a record of
an indebtedness; specifically an entry on the left-hand side of an account •
constituting an addition to an
expense or asset account or a deduction from a revenue, net worth, or liability •
account.
Credit •
It signifies the providing of a benefit. In simple words it is the right hand side. •
CREDIT, in
accounting, is an accounting entry system that either decreases assets or increases •
liabilities; in general, it
is an arrangement for deferred payment for goods and services. •

Prepared by: Muhammad akhtar

 University of Libya BETC
Double Entry Accounting System
Every financial transaction affects at least two accounts in the ledger-
an account in which a debit is recorded and an account in which a
credit is recorded. This is known as dual aspect rule or double entry
rule.
The double entry rules are summarized as follow:
Asset Account : Debit increase in Assets
Credit decrease in Assets
Personal Accounts: Debit decrease in liabilities
Credit increase in liabilities
Nominal Accounts :
For Expenses : Debit increase in expenses
Credit decrease in Expenses
For Income: Debit Decrease in revenue
Credit increase in revenu.

Prepared by: Muhammad akhtar

 University of Libya BETC
Balancing An Account
Each transaction will be entered in the appropriate column according to
whether it is a debit or credit entry. At periodic intervals each account will
be balanced. The procedure is as follow:
Balancing date 31 December 1998; if the debit side exceeds the credit sides.
Debit side Cash Account Credit side
Dec 1. Balance b/d 1000 Dec 2. Rent 500
3. Debtors 40000 4. wage 700
10 Sales 15000 20.Entertainment 800

31 .balance c/d 54000

56000 56000

Prepared by: Muhammad akhtar

 University of Libya BETC
Reasons for Balancing Account
1. To have up – to- date information about the overall state of each account.

2. To enable a trial balance to be prepared.

Prepared by: Muhammad akhtar

 University of Libya BETC
Recording Business Transactions.
Example 1. Mr Tee invests $ 50000 of his personal savings in a new •
business known as tee enterprise. The amount is banked with chartered
bank on 1 January 1994.
The above Transaction is recorded as follows: •
Bank Account •
1. January 1994 capital 50000 •
•
Tee Capital Account •
1 January 1994 bank 50000 •
Comment: The effect of this transaction is that the asset (i.e bank account) •
has been increased by the investment and hence is debited.
The capital account is credited to increase the contribution by the owner. •

Prepared by: Muhammad akhtar

 University of Libya BETC
Recording Business Transactions.
Example 2. Mr Tee borrowed $25000 from DBS Bank on 2nd January 1994.
The entries are as follows:
Bank Account
1. January 1994 Capital 50000
2. January 1994 Loan 25000

Loan – DBS Bank

2 January 1994 Bank Account 25000

Comment: Notice the same bank account is used to record this transaction. This is
because the transaction has the same effect of increasing the balance in the bank
account. Hence, the account is debited.
Notic also that the term, loa is used instead of capital. This is because the asset
(ie.bank) is obtained from external source and not from the owner. The transaction
also has the effect of increasing liabilities (debt) hence loan is
credited.

Prepared by: Muhammad akhtar

 University of Libya BETC
Recording Business Transactions.
Example 3 .Mr Tee purchased goods costing $ 5,000 and paid by
cheque on 5 January 1994.
The Transaction is recorded as follows:
Bank Account
1 jan 1994 capital 50000 5 Jan 1994 purchases 5000
2 Jan 1994 Loan 25000

Purchase Account
5 Jan 1994 Bank 5000

Comment: This transaction has the effect of reducing the asset (i.e bank balance) because
payment has been made by cheque. Therefore, the bank account is credited with the
amount paid.
A purchase account is used to record all purchases of goods for
resale. Since it is an expense account, the account is debited to increase the amount.

Prepared by: Muhammad akhtar

 University of Libya BETC
Recording Business Transactions.
Example 4. Mr Tee accquired an office equipment for $ 30000 from Beta furniture
on credit on 7 January 1995.

The entries are as follows:

Office Equipment Account
7 Jan 1994 Beta Furniture 30000

Beta Furniture Account

7 Jan 1994 Office Equipment 30000
Comment: This transaction has the effect of increasing an asset (i.e equipment ).
Hence, the office equipment is debited. The purchase amount is not used as
the item purchased is for used in the business and not for resale.
As payment has not been made, the bank account is not credited with the
amount. Instead, a creditor account is opened to record the transaction. Beta
Furniture is credited to reflect the increase in liabilities ( i.e the amount due to
the creditor).

Prepared by: Muhammad akhtar

 University of Libya BETC
Recording Business Transactions.
Example 5. The firm paid $ 3600 by cheque to cover three
months rent on 12 Jan 1994.
The Transaction is recorded as follows:

Bank Account
1 Jan 1994 Capital 50000 5 Jan 1994 Purchase 5000
2 Jan 1994 Loan 25000 12 Jan 1994 Rent 3600

Rent Account
12 Jan 1994 Bank 3600
Comments: The bank account is credited to reduce the asset (ie.bank
balance ) Since payment has been made.
AS the payment is for an expense, a rent account is used.
The account is debited as expense has increased.

Prepared by: Muhammad akhtar

 University of Libya BETC
Recording Business Transactions.
Example 6. Mr Tee took out $ 500 from business bank account to
purchase a television for personal use on 15 Jan 1994.

The Transaction is recorded as follows:

Bank Account
1 Jan 1994 Capital 50000 5 Jan 1994 Purcases 5000
2 Jan 1994 Loan 25000 12 Jan 1994 Rent 3600
15 Jan 1994 Drawings 500

Drawing Account
15 Jan 1994 Bank 500
Comment: As the cash withdrawn is for personal use, a drawing
account is opened to record the transaction. Drawing account is
debited to reflect the increase in private expense.

Prepared by: Muhammad akhtar

 University of Libya BETC
Recording Business Transactions.
Example 7:The firm sold goods to Beta plc for $ 8000 on credit on 20
January 1994.
The transaction is recorded as follows:
Beta Plc Account
20 Jan 1994 Sales 8000

Sales Account
20 Jan 1994 Beta plc 8000
Comment: Since the sales is made on credit, a debtor account (i.e Beta
plc account ) is opened to record the debt owed by the customer.
Beta plc account is debited to reflect the increase in asset ( debtor
is an asset).
Sales is an income, hence the sale account is credited to reflect the
increase in income.

Prepared by: Muhammad akhtar

 University of Libya BETC
Recording Business Transactions.
Example 8: Received $ 4600 from Beta plc on account on 21 Jan
1994 by cheque.

Bank Account
1 Jan 1994 Capital 50000 5 Jan 1994 Purchases 5000
2 Jan 1994 Loan 25000 12 Jan 1994 Rent 3600
21 Jan 1994 Beta plc 4600 15 Jan 1994 Drawings 500

Beta plc Account

20 Jan 1994 Sales 8000 21 Jan 1994 Bank 4600
Comment: The debtor account (i.e Beta plc) is credited to reduce the asset
representing the amount owing by the debtor.
The bank account (asset) is debited to reflect the increase in bank balance.

Prepared by: Muhammad akhtar

 University of Libya BETC
Ledgers
A ledger is simply a book containing a group of related accounts.

Debit Bank Account Credit

1 January 1994 Capital 50000 5 Jan 1994 Purchases 5000
2 January 1994 Loan 25000 12 Jan 1994 Rent 3600
21 Jan 1994 Beta Plc 4600 15 Jan 1994 Drawings 500

31 Jan 1994 Balance c/d 70500

79600 79600

Prepared by: Muhammad akhtar

 University of Libya BETC
Ledgers
A ledger is simply a book containing a group of related accounts.

Debit Tee Capital Account Credit

1 Jan 1994 Bank 50000

31 Jan 1994 b/c

50000
50000 50000

Prepared by: Muhammad akhtar

 University of Libya BETC
Ledgers
A ledger is simply a book containing a group of related accounts.

Debit Loan Account Credit

2 Jan 1994 Bank 25000

31 Jan 1994 b/c

25000
25000 25000

Prepared by: Muhammad akhtar

 University of Libya BETC
Ledgers
A ledger is simply a book containing a group of related accounts.

Debit Purchases Account Credit

5 Jan 1994 bank a/c 5000

31Jan 1994 c/d

5000
5000 5000

Prepared by: Muhammad akhtar

 University of Libya BETC
Ledgers
A ledger is simply a book containing a group of related accounts.

Debit Office Equipment A/C Credit

7 Jan 1994 Beta Furniture

30000

31 Jan 1994 c/d

30000
30000 30000

Prepared by: Muhammad akhtar

 University of Libya BETC
Ledgers
A ledger is simply a book containing a group of related accounts.

Debit Beta Furniture A/C Credit

20 Jan Sales 8000 7 Jan 1994 Office Equipment 30000

21 Jan 1994 Bank 4600

31 Jan 1994 c/d 26600

34600 34600

Prepared by: Muhammad akhtar

 University of Libya BETC
Ledgers
A ledger is simply a book containing a group of related accounts.

Debit Rent A/C Credit

12 Jan 1994 Bank account 3600

31 Jan 1994 c/d

3600
3600 3600

Prepared by: Muhammad akhtar

 University of Libya BETC
Ledgers
A ledger is simply a book containing a group of related accounts.

Debit Drawings A/C

Credit

15 Jan 1994 Bank account 500

31 Jan 1994 c/d

500
500 500

Prepared by: Muhammad akhtar

 University of Libya BETC
Ledgers
A ledger is simply a book containing a group of related accounts.

Debit Sales A/C Credit

20 Jan 1994 Beta Account

8000

31 Jan 1994 c/d 8000

8000 8000

Prepared by: Muhammad akhtar

 University of Libya BETC
Trial Balance
A Trial balance is a listing of all of the balances in each ledger
account. It is usually prepared at the end of each accounting
period.
Purposes:
A trial balance has two main purposes:
1. To provide an arithmetical check on the accuracy of the ledger.
2. As preliminary step in the preparation of the financial
statements.

Prepared by: Muhammad akhtar

 University of Libya BETC
Mr Tee Trial balance as at 31 January 1994
Date Particulars Debit Credit

Bank Account 70500

Capital Account 50000
Loan Account 25000
Purchases Account 5000
Office Equipment Account 30000

Beta Account 26600

Rent Account 3600

Drawing Account 500
Sales Account 8000

Total 109600 109600

Prepared by: Muhammad akhtar