Rule No. 1: Assets and Expenses are debit in nature, meaning that an increase in Assets and/or Expenses generates a debit, while a decrease in Assets and/or Expenses generates a credit. Liabilities, owners’ equity and income are credit in nature, meaning that an increase in liabilities, owners’ equity and/or income generates a credit, while a decrease in liabilities, owners’ equity of the owners and/or the income generates a debit.

Rule No. 2: Debits must equal Credits

Rule No. 3: Income – Expenses = Profit (if positive) or Loss (if negative)

Rule No. 4: The gain is added while the loss is deducted from the owner’s equity.

Rule No. 5: Assets = Liabilities + Owners’ Equity

Rule #6:
Increase in debits = Increase in credits
Decrease in debits = Decrease in credits
Increase in debits = Decrease in debits
Credit Increase = Credit Decrease

Rule No. 7: Every accounting transaction affects AT LEAST one debit account and one credit account.

Let us understand the above rules by analyzing certain transactions:
Transaction analysis: Affected account (Accounting element – Increase/Decrease – Debit/Credit)

1. The owner contributed cash to the business.
Transaction analysis: Cash (Assets – Increase – Debit) and Capital (Owners’ Equity – Increase – Credit)

2. Buy shares on credit from a supplier.
Transaction analysis: Stock (Assets – Increase – Debit) and Creditor (Liability – Increase – Credit)

3. Sold property for cash.
Transaction analysis: Cash (Assets – Increase – Debit) and Sales (Income – Increase – Credit)
and Stock (Assets – Decrease – Credit) and Cost of sales (Expenses – Increase – Debit)

4. Paid the provider.
Transaction analysis: Cash (Asset – Decrease – Credit) and Creditor (Liability – Decrease – Debit)

5. Machinery purchased with cash.
Transaction analysis: Cash (Assets – Decrease – Credit) and Machinery (Assets – Increase – Debit)

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