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Rules of Debit and Credit

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During Pumori Banking Software training sessions, I found most of the IT trainees of financial institutions puzzled about the rules of debit and credit in accounting. To simplify I have prepared following guide. Hope it helps.

Accounts
Accounts are the records that are kept for individual assets, liability, capital, income and expenses. Business maintain an account for creditors another for cash, another for income and so on for every other financial element.  All these accounts are collectively shown in company’s General Ledger.

In a manual system, General Ledger can be imagined as notebook with separate page for every account that records “ins” and “outs” of every account with existing Balances.

Debits and credits are accounting tools to describe the change in a particular account. In accounting instead of saying that cash has “increased” or “decreased” we can say that cash is “debited” or “credited”.

Accounts in Financial Institutions
Before looking at the rules of Debit and Credit, we should see how accounts are treated in banks.

Deposits in banks are treated as liability because bank has an obligation to pay the depositor the money deposited; usually on demand.
Loans disbursed by banks are assets.

Rules of Debit and Credit
1. Assetsdebitcredit
+ Increase: Debits
- Decrease: Credits

2. Liabilities
+ Increase: Credits
-  Decrease: Debits

3. Capital
+ Increase: Credits
-  Decrease: Debits

4. Expenses (Loss)
+ Increase: Debits
-  Decrease: Credits

5. Income (Profit)
+ Increase: Credits
-  Decrease: Debits

Examples for Financial Institutions:
To Increase Loan(In FI, Loans are Asset) Account: Debit, To Decrease Loan Account: Credit
Eg. Loan Disburse: Loan Account Debit, Nominee Account Credit .
Loan Repayment: Loan Account Credit, Nominee Account Debit .

To Increase Deposit(In FI, Deposits are Liabilities) Account: Credit, To Decrease Deposit Account: Debit.
Eg. Deposit: Customer’s Deposit Account Credit.
Withdrawal: Customer’s Deposit Account Debit.

To increase Expenses: Debit, To decrease Expenses: Credit
Eg. Office Expenses: Expenses account Debit

To increase Income: Credit, To decrease Income: Debit
Eg. Loan Processing Charge: Credit

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