Fundamentals of Accounting · Accounting Process

Accounting Equation and Rules of Debit and Credit

Updated 11 October 2026 · Fact-checked

The accounting equation is Assets = Liabilities + Capital. Every transaction changes it but keeps both sides equal. To record a transaction, find the accounts affected, classify each as personal, real or nominal, apply the golden rule to decide debit or credit, and check that total debits equal total credits.

Understand Accounting Equation and Rules of Debit and Credit

Every business owns things and owes things. What it owns are assets, such as cash, stock, machinery and money due from customers. What it owes to outsiders are liabilities, such as loans and amounts due to suppliers. What is left for the owner is capital. This gives the accounting equation: Assets = Liabilities + Capital.

The equation always balances because every transaction has two effects. If you buy goods for cash, one asset (stock) rises and another asset (cash) falls. The equation stays equal. This two-sided effect is the base of the double entry system: every debit has an equal credit.

Accounts are grouped into three types. A personal account relates to a person or a body: Ramesh, Sharma & Co., HDFC Bank, the capital account of the owner. A real account relates to things the business owns: cash, building, machinery, furniture, stock, goodwill. A nominal account relates to expenses, losses, incomes and gains: rent, salaries, discount allowed, interest received, commission earned.

Debit is the left side of an account and credit is the right side. They are not good or bad, and they do not mean increase or decrease by themselves. The three golden rules tell you which side to use for each type of account. Learn them once and you can record any transaction.

Another route is the equation itself. Assets and expenses increase by debit. Liabilities, capital and incomes increase by credit. Decreases are the opposite. Both routes give the same answer, so use one to check the other.

Key rules to remember

Accounting equation: Assets = Liabilities + Capital; Capital = Assets − Liabilities. Holds after every transaction.
Personal account rule: Debit the receiver; Credit the giver; Applies to accounts of persons, firms, banks, companies, the owner's capital and the owner's drawings.
Real account rule: Debit what comes in; Credit what goes out; Applies to assets such as cash, goods, machinery and furniture.
Nominal account rule: Debit all expenses and losses; Credit all incomes and gains; Applies to rent, wages, commission received, interest earned and similar items.
Double entry check: Total debits = Total credits; Every transaction has at least one debit and one credit of equal total amount.

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

Use this method for any question that asks you to classify accounts, apply debit and credit, or show the effect of a transaction on the equation.

1Read the transaction and list every account affected. There are at least two.
2Classify each account as personal, real or nominal.
3Apply the matching golden rule to each account and decide debit or credit.
4Write the entry as 'Account name A/c ... Dr.' and 'To Account name A/c', with the amount.
5Check that the debit amount equals the credit amount.
6If asked, show the effect on assets, liabilities and capital and confirm Assets = Liabilities + Capital.
7Write the type of each account in brackets so the examiner sees your reasoning.

Quickest way: Increase-decrease shortcut

When to use it: Use this when you have little time, mainly for MCQ-style or short classification parts.

Ask: what increased and what decreased?
Assets and expenses: increase is Dr, decrease is Cr.
Liabilities, capital and incomes: increase is Cr, decrease is Dr.
Confirm with the golden rule for one account. If both agree, you are done.
Remember that cash received means Dr Cash, cash paid means Cr Cash.

Common mistakes in Accounting Equation and Rules of Debit and Credit

Treating debit as 'decrease' and credit as 'increase' for every account.
Bank statements use credit for money added, so students carry this idea over.
Fix: Remember that the effect depends on the account type. Debit increases assets and expenses but decreases liabilities and capital.
Classifying outstanding rent or prepaid insurance wrongly as nominal only.
Students see the word 'rent' or 'insurance' and stop reading.
Fix: The expense itself (Rent A/c, Insurance A/c) is nominal. But Outstanding Rent A/c is a representative personal account, because it is a liability to the person to whom rent is owed. Prepaid Insurance A/c is an asset, because the business has paid for cover it has not yet used. It is usually treated as a real account, though some books call it a representative personal account. Neither is nominal. Read the full wording.
Calling the owner's capital account a real account.
Capital sounds like money or property.
Fix: Capital is a personal account because it represents the owner, to whom the business owes it.
Using the personal account rule for cash.
Students think of the person who paid cash instead of the cash itself.
Fix: Cash is a real account. Use 'debit what comes in, credit what goes out' for cash.
Debiting drawings as an expense.
Money leaves the business, so it looks like a cost.
Fix: Drawings reduce the owner's capital. Debit Drawings A/c, which is a personal account like the capital account, and credit Cash. Both routes agree: by the equation route, drawings are debited because they reduce capital, and by the golden rule route, they are debited because the owner is the receiver.
Writing only one side of the entry.
Students rush and forget that every transaction has two effects.
Fix: After each entry, tick one debit and one credit and compare the amounts.

Worked examples

Example 1

Classify the following accounts as personal, real or nominal: (a) Machinery A/c (b) Salaries A/c (c) Anil Traders A/c (d) Commission Received A/c (e) Capital A/c.

Show the solution

Machinery is a thing the business owns, so it is a real account.
Salaries is an expense, so it is a nominal account.
Anil Traders is a firm, so it is a personal account.
Commission received is an income, so it is a nominal account.
Capital is owed to the owner, so it is a personal account.

Answer: (a) Real (b) Nominal (c) Personal (d) Nominal (e) Personal.

Example 2

Meera starts a business with cash ₹5,00,000. She buys goods for ₹1,50,000 in cash, buys furniture for ₹50,000 on credit from Ravi Furnishers, and pays rent ₹10,000 in cash. Give the debit and credit for each transaction and show the accounting equation after the first two transactions.

Show the solution

Commenced business: Cash A/c (real) comes in, so Dr ₹5,00,000. Capital A/c (personal) is the giver, so Cr ₹5,00,000.
Goods purchased: Purchases A/c is a nominal (trading) account and is debited for goods bought, so Purchases A/c Dr ₹1,50,000. Cash A/c (real, going out) Cr ₹1,50,000. For the equation, treat these goods as stock, an asset.
Furniture on credit: Furniture A/c (comes in) Dr ₹50,000. Ravi Furnishers A/c (giver) Cr ₹50,000.
Rent paid: Rent A/c (expense) Dr ₹10,000. Cash A/c (going out) Cr ₹10,000.
After transaction 1: Assets ₹5,00,000 = Liabilities 0 + Capital ₹5,00,000.
After transaction 2: Cash falls to ₹3,50,000. For the equation, the goods bought are stock, an asset of ₹1,50,000. Assets = ₹3,50,000 + ₹1,50,000 = ₹5,00,000. Liabilities 0 + Capital ₹5,00,000, so the equation holds.

Answer: Dr Cash and Cr Capital ₹5,00,000; Dr Purchases and Cr Cash ₹1,50,000; Dr Furniture and Cr Ravi Furnishers ₹50,000; Dr Rent and Cr Cash ₹10,000. After the first two transactions, Assets ₹5,00,000 = Capital ₹5,00,000.

Exam tips

In written answers, name the account type in brackets next to each account. It shows your reasoning and can earn method marks.
Practise classification lists quickly. Questions often give 8 to 10 accounts and ask for the type of each.
Always use the full format: 'Dr' on the first line and 'To' on the credit line.
If a question gives the equation with one missing figure, rearrange it first: Capital = Assets − Liabilities.
Check your totals for debit and credit before moving on.

Practice questions from Accounting Process

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 is the accounting equation in simple words?

It says that what a business owns equals what it owes plus what the owner has put in. In symbols, Assets = Liabilities + Capital. It stays true after every transaction.

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.

Is cash a real or personal account?

Cash is a real account. When cash is received, debit Cash A/c. When cash is paid, credit Cash A/c.

Why must debit always equal credit?

Every transaction has two equal effects in double entry bookkeeping. If the two sides differ, an error has been made, which the trial balance can help you detect.