Fundamentals of Financial and Cost Accounting · Journal and Ledger

Accounting Equation and Golden Rules of Debit and Credit

Updated 10 October 2026 · Fact-checked

The accounting equation says Assets = Liabilities + Capital. Every transaction keeps it balanced. To record a transaction, classify each account as personal, real or nominal, then apply its golden rule: debit the receiver, debit what comes in, debit expenses and losses; credit the giver, credit what goes out, credit incomes and gains.

Understand Accounting Equation and Rules of Debit and Credit

Accounting starts with one idea: a business owns things and owes money for them. What the business owns are assets. What it owes to outsiders are liabilities. What is left for the owner is capital. This gives the accounting equation: Assets = Liabilities + Capital.

Every transaction changes at least two items, so the equation always stays balanced. This is the dual aspect of accounting. If you buy furniture for cash, one asset rises and another asset falls. If you borrow from a bank, an asset (cash) rises and a liability (loan) rises by the same amount.

To record the two sides, we use debit (Dr, left side) and credit (Cr, right side). These words do not mean good or bad. They only mean left and right. For every transaction, total debits equal total credits.

Accounts are of three types. Personal accounts relate to persons: individuals (Ravi's A/c), firms, companies, banks, and also representative personal accounts such as outstanding rent or prepaid insurance. Real accounts relate to assets and things: cash, machinery, goods, land, and also intangibles like goodwill and patents. Nominal accounts relate to expenses, losses, incomes and gains: rent, salaries, discount allowed, commission received.

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. Learn these three lines and you can journalise any transaction.

Key formulas to remember

Accounting equation: Assets = Liabilities + Capital; Capital can be found as Assets − Liabilities. Also written as Capital = Assets − Liabilities.
Expanded equation: Assets = Liabilities + Opening Capital + Profit − Drawings (+ Fresh Capital); Profit = Incomes − Expenses. Profit raises capital, drawings reduce it.
Personal account rule: Debit the receiver; Credit the giver; Applies to persons, firms, companies, banks and representative personal accounts.
Real account rule: Debit what comes in; Credit what goes out; Applies to assets such as cash, goods, machinery, land and goodwill.
Nominal account rule: Debit all expenses and losses; Credit all incomes and gains; Applies to rent, wages, interest paid, commission received, and so on.
Dual aspect: Total Debits = Total Credits; Holds for every transaction.

How to solve Accounting Equation and Rules of Debit and Credit questions

Use this method for any question that asks you to identify the account to debit or credit, or to show the effect on the accounting equation.

1Read the transaction and list every account involved. There are at least two.
2Classify each account as personal, real or nominal.
3Ask what happened to each account: did it receive, give, come in, go out, or is it an expense or income?
4Apply the golden rule of that account type to decide debit or credit.
5Check that the total debit equals the total credit.
6For equation questions, mark each item as asset, liability or capital and check that the change on the left equals the change on the right.
7Match your result with the options and eliminate the ones that put the same account on both sides.

Quickest way: Asset-expense-liability shortcut

When to use it: Use it for MCQs that ask which account is debited or credited. It is faster than naming account types.

Remember: assets and expenses increase by debit; liabilities, capital and incomes increase by credit.
Decrease is the opposite side of increase.
Decide for each account whether it increases or decreases.
Pick debit or credit using the rule above.
Use the golden rules only to double-check when a question is tricky.

Common mistakes in Accounting Equation and Rules of Debit and Credit

Treating debit as 'increase' and credit as 'decrease' for every account.
Bank statements use credit for a deposit, so students carry that meaning over.
Fix: Debit and credit mean left and right. Debit increases assets and expenses. Credit increases liabilities, capital and incomes.
Calling outstanding expenses or prepaid expenses nominal accounts.
The word 'expense' makes students think nominal.
Fix: Under the personal-account classification, outstanding and prepaid expenses are shown as representative personal accounts. Outstanding rent is a liability and prepaid rent is an asset. The outstanding or prepaid amount is not itself the nominal expense. Only the rent expense account is nominal.
Treating Drawings as an expense.
Money leaves the business, so it feels like a cost.
Fix: Drawings are not an expense. Drawings is a personal account of the proprietor, who is the receiver, so it is debited. Credit Cash for cash withdrawn or Purchases for goods taken. Drawings reduce capital and are not charged to profit.
Classifying goodwill or patents as nominal because you cannot touch them.
Students link 'real' only with physical things.
Fix: Intangible assets are real accounts. Debit when acquired.
Debiting the giver in a personal account.
Students reverse the rule when the person is a creditor.
Fix: Ask who received the benefit. If you pay Ravi, Ravi receives, so debit Ravi. If Ravi supplies goods on credit, Ravi gives, so credit Ravi.
Forgetting that a transaction can leave the equation total unchanged.
Students expect both sides to always rise.
Fix: If one asset rises and another falls, the totals stay the same. Check which items moved before deciding.

Worked examples

Example 1

A business starts with cash ₹5,00,000. It buys furniture for ₹80,000 in cash, then buys goods for ₹1,20,000 on credit from Mehta. What are total assets, liabilities and capital after these transactions? (a) Assets ₹6,20,000, Liabilities ₹1,20,000, Capital ₹5,00,000 (b) Assets ₹5,00,000, Liabilities ₹1,20,000, Capital ₹3,80,000 (c) Assets ₹6,20,000, Liabilities ₹0, Capital ₹6,20,000 (d) Assets ₹7,00,000, Liabilities ₹1,20,000, Capital ₹5,80,000

Show the solution

Start: Cash ₹5,00,000 = Capital ₹5,00,000.
Furniture bought for cash: furniture +₹80,000, cash −₹80,000. Assets stay ₹5,00,000.
Goods bought on credit: stock +₹1,20,000 (asset), creditor Mehta +₹1,20,000 (liability).
Assets = Cash 4,20,000 + Furniture 80,000 + Stock 1,20,000 = ₹6,20,000.
Liabilities = ₹1,20,000. Capital = 6,20,000 − 1,20,000 = ₹5,00,000.
Check: 6,20,000 = 1,20,000 + 5,00,000. Option (a) matches.

Answer: (a) Assets ₹6,20,000, Liabilities ₹1,20,000, Capital ₹5,00,000

Example 2

Paid rent ₹15,000 by cash. Which account is debited and which is credited, and what are their types? (a) Debit Cash (real), Credit Rent (nominal) (b) Debit Rent (nominal), Credit Cash (real) (c) Debit Rent (personal), Credit Cash (real) (d) Debit Cash (nominal), Credit Rent (real)

Show the solution

Accounts involved: Rent and Cash.
Rent is an expense, so it is a nominal account. Cash is an asset, so it is a real account.
Nominal rule: debit expenses. So debit Rent ₹15,000.
Real rule: credit what goes out. Cash goes out, so credit Cash ₹15,000.
Debit ₹15,000 equals credit ₹15,000. Option (b) is correct.

Answer: (b) Debit Rent (nominal), Credit Cash (real)

Exam tips

Most questions are one-line transactions. Name the two accounts first, then apply the rule. This takes under 30 seconds.
Watch for tricky items: drawings, outstanding expenses, prepaid expenses, goodwill and bank loans. Know their account type by heart.
In equation questions, write A = L + C and fill in the numbers. Do not do it in your head.
Eliminate options that put the same account on both the debit and credit side, or that debit an account whose rule requires a credit.
There is no negative marking, so attempt every question even if you must guess after elimination.

Practice questions from Journal and Ledger

Accounting Equation 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.

Accounting Equation and Rules of Debit and Credit: frequently asked questions

What are the golden rules of accounting?

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 are personal, real and nominal accounts with examples?

Personal accounts relate to persons, such as Ravi's A/c, a bank or a company. Real accounts relate to assets, such as cash, machinery and goodwill. Nominal accounts relate to expenses and incomes, such as rent paid and commission received.

Does the accounting equation always balance?

Yes. Each transaction has two equal effects, so Assets always equal Liabilities plus Capital. Some transactions change both sides. Others only shift amounts within one side.

Is debit always an increase?

No. Debit increases assets and expenses, but decreases liabilities, capital and incomes. Credit does the opposite: it decreases assets and expenses, and increases liabilities, capital and incomes. So the effect of a debit depends on the type of account. Debit simply means the left side of an account.