How to Know Which Account to be Debited or Credited?

In the Double Entry System, every transaction has two sides. One account is debited, and the other is credited. So when you make some, say 10 entries, there will be 10 debit entries and 10 credit entries. The total of Debits and the total of Credits will tally at the end of any day. If they do not tally, it means the entries are wrong, and you will have to recheck each entry to verify that each Debit received a corresponding Credit.

Now, coming to Debit and Credit, how to know which account should be debited or credited?

The simple rule is Debit all Payments and Credit all Receipts.

Let me clear this point through these simple steps:

DEBITS (Payments)

• Assets: You are making a payment and receiving some asset. Payment may be whole or in parts. But you are paying. So, debit the Asset a/c (e.g., Land, Building, Plant & Machinery, Computer, etc.) or the Advances a/c with the amount paid.
• Purchases of Stock: Here also you are paying for stock items. So debit Stock a/c.
• Expenses: Here you are paying for the travel and tour bills, stationery items, postage and courier charges, etc. So, debit the relevant account heads.
• Adhoc or Advances: Sometimes you pay an amount as advance for any job or contract for executing some work or supplies. Here, you will debit the advances a/c either in the party name or by the Work name.

CREDITS (Receipts)

• Capital or Equity: Your business receives capital or share capital to start and run the business. So, Credit the Capital/Equity a/c or Share Capital a/c.
• Liabilities: You take loans for your business. Your business received the loan. So, credit the Loan a/c.Say SBI loan a/c, ICICI loan a/c, IDBI loan a/c. etc. Further, your business receives money from customers against supplies. So, credit the Customer a/c by his name. 
• Income/Revenue: You sell items or provide services and in return, receive income for those services. So, credit the Sales a/c or othe Other Income a/c. If some interest is received on FDRs or Savings A/C, etc. Credit those Interest Received income accounts.

So, from the above study, you can see that as a beginner in accounts, it is sufficient that you remember the basic fact "Debit all Payments and Credit all Receipts".

Let us consider an example:

Suppose A invested 10,00,000 to start a business. He rented a shop for 10,000 per month and paid six months' advance. He bought furniture and fittings worth 80,000. Purchased goods (say readymade garments for sale) worth 5,00,000. Employed two workers at a salary of 5,000 each/per month. He sold his goods worth 4,50,000 within a month with a profit of 50,000.

The accounting entries for the above transactions will be as follows:

1. A invested money, and he has to be repaid. His account is credited under Capital a/c by 10,00,000, and the Bank/cash account gets debited (depending upon Cheque or Cash).
2. Rent Account is debited with 10,000, Advance Rent with 50,000, and credit is given to Bank/Cash.
3. Furniture and Fittings is debited with 80,000 and Cash/Bank credited by the same amount.
4. Stores/Stock account is debited with 5,00,000, and Credit is given to Bank/Cash
5. As and when goods are sold, each sale value is credited to the Stock account at the actual purchase price, and the extra (inflated amount) is credited to the Sales Income account.
6. Whenever salary is paid, 10,000 is debited to the Salaries account with credit to Bank/Cash.