Fundamentals of Financial and Cost Accounting · Accounting Cycle

Journal Entries and Rules of Debit and Credit for CMA Foundation

Updated 10 October 2026 · Fact-checked

A journal entry is the first record of a transaction under the double entry system. Every transaction has two equal effects: one account is debited and another is credited. Classify each account as personal, real or nominal, apply its golden rule, then write the entry with date, accounts, amounts and narration.

Understand Journal Entries and Rules of Debit and Credit

Every business transaction affects at least two accounts. If you buy goods for cash, goods come in and cash goes out. The double entry system records both effects. For every debit there is an equal credit, so total debits always equal total credits.

The journal is the book of original entry. You record transactions here first, in date order, before posting them to the ledger. Each entry shows the date, the account to be debited, the account to be credited, the amounts, and a short narration explaining the transaction.

To know which side to use, first classify the account. A personal account relates to persons, firms, companies or institutions (Ravi, Sharma & Co., a bank). A real account relates to assets and properties (cash, machinery, goods, building). A nominal account relates to expenses, losses, incomes and gains (rent, salary, commission received, discount allowed).

Each type has a golden rule. Personal: debit the receiver, credit the giver. Real: debit what comes in, credit what goes out. Nominal: debit all expenses and losses, credit all incomes and gains.

The rules are a way to apply the accounting equation. Assets and expenses increase on the debit side. Liabilities, capital and incomes increase on the credit side. If you understand this, you can handle any unfamiliar transaction.

Key formulas to remember

Personal account rule: Debit the receiver; Credit the giver; Applies to persons, firms, companies and banks. The person who receives a benefit is debited.
Real account rule: Debit what comes in; Credit what goes out; Applies to assets such as cash, goods, furniture and machinery.
Nominal account rule: Debit all expenses and losses; Credit all incomes and gains; Applies to rent, wages, interest paid, commission received, discount received and similar items.
Modern rule for assets and expenses: Increase in assets or expenses = Debit; Decrease = Credit; Asset and expense accounts normally have debit balances.
Modern rule for liabilities, capital and income: Increase in liabilities, capital or income = Credit; Decrease = Debit; These accounts normally have credit balances.
Double entry principle: Total debits = Total credits; Every journal entry must balance.

How to solve Journal Entries and Rules of Debit and Credit questions

Use the same routine for every transaction. It keeps you from reversing debit and credit.

1Read the transaction and list the two (or more) accounts affected.
2Classify each account as personal, real or nominal.
3Decide whether each account increases or decreases, or who receives and who gives.
4Apply the golden rule to each account to decide debit or credit.
5Write the entry as: Date, Debit account Dr, To Credit account, with amounts.
6Check that total debit equals total credit, especially in compound entries.
7Add a short narration and confirm the amount is the correct one, such as net of trade discount.

Quickest way: Ask: what comes in, what goes out

When to use it: Use this for MCQs that ask which account to debit or credit, or what the entry looks like.

Find the asset or expense that increased and mark it Debit.
Find the asset that decreased, or the income, liability or capital that increased, and mark it Credit.
For a person, ask who received value. That person is debited. If the person gave value, credit.
Eliminate options where debit total does not equal credit total.
Eliminate options that debit an income or credit an expense for a normal transaction.

Common mistakes in Journal Entries and Rules of Debit and Credit

Debiting the giver and crediting the receiver in personal accounts
Students think of money flowing out of the person instead of benefit flowing in.
Fix: Remember that the receiver is debited. When you sell goods on credit to Ravi, Ravi receives goods, so Ravi A/c is debited.
Treating drawings as an expense
Money leaves the business, so it looks like a cost.
Fix: Drawings reduce capital. Debit Drawings A/c and credit Cash A/c. It is not a nominal expense.
Classifying outstanding rent or accrued income wrongly
Students focus on the word 'rent' or 'income' and apply the nominal rule only.
Fix: Record the nominal account for the expense or income, and the matching personal or liability or asset account, such as Outstanding Rent or Accrued Income, on the other side.
Recording trade discount in the journal
Students show the full list price instead of the net price.
Fix: Record purchases and sales at the amount after trade discount. Trade discount is not entered in the books. Cash discount is entered, as Discount Allowed or Discount Received.
Forgetting that a compound entry must balance
Several accounts are involved and one amount is missed.
Fix: Add the debit amounts and credit amounts separately after writing the entry. They must be equal.
Mixing purchase of goods with purchase of an asset
The word 'purchased' appears in both cases.
Fix: Goods bought for resale go to Purchases A/c. Furniture or machinery for use in the business is debited to its own asset account.

Worked examples

Example 1

Pass journal entries for these transactions of Mehta Traders: (i) Started business with cash ₹2,00,000. (ii) Purchased goods for cash ₹40,000. (iii) Sold goods on credit to Ravi for ₹25,000. (iv) Paid rent ₹5,000.

Show the solution

(i) Cash comes in, so debit Cash A/c. Capital is the owner's claim on the business and increases, so credit Capital A/c.
(ii) Goods come in, so Purchases A/c is debited. Cash goes out, so Cash A/c is credited.
(iii) Ravi receives goods, so Ravi A/c is debited. Sales is an income, so Sales A/c is credited.
(iv) Rent is an expense, so Rent A/c is debited. Cash goes out, so Cash A/c is credited.

Answer: (i) Cash A/c Dr ₹2,00,000 To Capital A/c ₹2,00,000. (ii) Purchases A/c Dr ₹40,000 To Cash A/c ₹40,000. (iii) Ravi A/c Dr ₹25,000 To Sales A/c ₹25,000. (iv) Rent A/c Dr ₹5,000 To Cash A/c ₹5,000.

Example 2

Journalise: (i) Bought furniture for ₹30,000 and paid by cheque. (ii) Received ₹9,800 from Sita in full settlement of her account of ₹10,000. (iii) The proprietor took goods costing ₹3,000 for personal use.

Show the solution

(i) Furniture is an asset coming in, so debit Furniture A/c. The bank balance goes down, so credit Bank A/c.
(ii) Cash ₹9,800 comes in, so debit Cash A/c. Discount allowed ₹200 is a loss, so debit Discount Allowed A/c. Sita's account is cleared by ₹10,000, so credit Sita A/c.
Check (ii): debits 9,800 + 200 = 10,000, credits 10,000. It balances.
(iii) Drawings reduce capital, so debit Drawings A/c. Goods go out, so credit Purchases A/c (or Goods A/c) at cost ₹3,000. Do not use Sales A/c, because the goods are not sold. Some books use a separate adjustment for drawings in kind instead, but the debit to Drawings A/c at cost is the same.

Answer: (i) Furniture A/c Dr ₹30,000 To Bank A/c ₹30,000. (ii) Cash A/c Dr ₹9,800 and Discount Allowed A/c Dr ₹200 To Sita A/c ₹10,000. (iii) Drawings A/c Dr ₹3,000 To Purchases A/c (or Goods A/c) ₹3,000, at cost and not through Sales A/c.

Exam tips

Most MCQs test one decision: which account is debited or credited. Classify the account first, then apply the rule. This takes seconds.
Watch for cash discount, drawings, bad debts and outstanding items. These are common trap transactions.
In compound entry options, check that debits equal credits before reading further. Often this removes two options.
Do not record trade discount. If a question gives list price and trade discount, use the net amount.
With no negative marking, answer every question. If unsure, eliminate options that debit an income or credit an expense and guess from the rest.

Practice questions from Accounting Cycle

Journal Entries and Rules of Debit and Credit in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Journal Entries and Rules of Debit and Credit: frequently asked questions

What are the golden rules of accounting?

There are three. For personal accounts, debit the receiver and credit the giver. For real accounts, debit what comes in and credit what goes out. For nominal accounts, debit expenses and losses and credit incomes and gains.

What is the difference between personal, real and nominal accounts?

Personal accounts relate to persons and organisations. Real accounts relate to assets and properties. Nominal accounts relate to expenses, losses, incomes and gains. Each type follows its own golden rule.

Is capital a personal account?

Yes, capital is generally treated as a personal account because it represents the owner's claim on the business. When the owner brings in money, Capital A/c is credited. The business is the receiver of cash, so Cash A/c is debited.

Why must debits always equal credits?

Every transaction has two equal effects under the double entry system. If one account is debited for an amount, other accounts are credited for the same total. This is why the trial balance is expected to tally.

What is narration in a journal entry?

Narration is a brief explanation written below the entry. It states what the transaction was, for example, goods sold on credit to Ravi. It helps anyone reading the books understand the reason for the entry.