Credit Aspects of transactions

Aspects of transactions

To determine whether one must debit or credit a specific account we use either the accounting equation approach which consists of five accounting rules or the traditional approach based on three rules (for Real accounts, Personal accounts, and Nominal accounts) to determine whether to debit or to credit an account.

• Real accounts are the assets of a firm, which may be tangible (machinery, buildings etc.) or intangible (goodwill, patents etc.)
• Personal accounts relate to individuals, companies, creditors, banks etc.
• Nominal accounts relate to expenses, losses, incomes or gains.

Whether a debit increases or decreases an account depends on what kind of account it is. An increase to an asset account is a debit. An increase to a liability or to an equity account is a credit.

Kind of account	Debit	Credit
Asset	Increase	Decrease
Liability	Decrease	Increase
Income/Revenue	Decrease	Increase
Expense	Increase	Decrease
Equity/Capital	Decrease	Increase

Conversely, a decrease to an asset account is a credit. A decrease to a liability or equity account is a debit.

Debits and credits occur simultaneously in every financial transaction in double-entry bookkeeping. In the accounting equation—Assets = Liabilities + Equity—if an asset account increases (a debit), then either another asset account must decrease (a credit), or a liability or equity account must increase (a credit).

For example, when the customer of a bank deposits money into his bank account two things change: the customer's cash-in-hand (asset) decreases and the customer's bank account balance increases. The decrease in the cash-in-hand asset is a credit while the increase in the bank account balance is a debit of equal magnitude.

The bank views the transaction from a different perspective but follows the same rules: the bank's vault cash (asset) increases, which is a debit; the increase in the customer's account balance (liability from the bank's perspective) is a credit. A customer's periodic bank statement generally shows transactions from the bank's perspective, with bank deposits characterized as credits and withdrawals as debits.

Debits are traditionally entered on the left-hand side of a ledger and credits on the right-hand side.