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Debit means decrease in proprietor’s equity and credit means increase in proprietor’s equity. Business is the creation of the businessman. In other words, business is the representative of the proprietors of the business. Whatever the business earns, has to be paid to its proprietors. It will increase proprietor’s claim against the business or proprietor’s equity or capital and thus it has to be credited. In this way, we can say that income increases proprietor’s equity, therefore it is to be credited. The word ‘credit’ refers to the word ‘creditor’, whose short form is known as ‘Cr’. Creditors are those persons and parties whom payment has to be made. In case of income proprietor is the creditor of the business because the income earned by business, the representative of the proprietor belongs to the owner of the business. It increases proprietor’s capital as such it is to be credited. All the expenses are incurred by the business on behalf of the proprietors, therefore, proprietors are liable to bear these expenses. It will decrease their equity and thus debited in the books of accounts. The word ‘debit’ refers to the word ‘Debtor’, whose short from is ‘Dr’. The proprietor is the debtor for all expenses, and thus he is rightly debited.

Acquiring assets by the business is also an expenditure of capital nature. These assets are acquired by the business on behalf of the proprietor, so the proprietor is liable for the expenditure on assets. It will decrease his claim towards the business or decrease his equity, so increase in assets will be debited as the rule goes. ‘Debit decrease in proprietors equity’. There is an opposite relationship between assets and proprietor’s claim against the business. Increase in the assets decreases proprietor’s claim and in the same way, decrease in the assets increases proprietor’s share in the business. The decrease in the assets means the business has to realize lesser from the proprietor, so it will increase proprietors’ claim and thus credited.

Increase in capital is undoubtedly an increase in proprietor’s equity and thus it will be credited. Decrease in capital reduces proprietor’s share in the business and thus debited. Increase in the liability of the business means the funds arranged by the firm for the business whose real owner is the proprietor as such, the owner will have a claim over these arranged funds. It will increase proprietor’s equity and thus credited. Payment of liabilities will decrease the funds of the business, so the proprietor’s claim against the business will also decrease and debited. The debits or credits do not mean good or bad. It is their use which may either be in the interest or against the interest of the firm :

The rules of ‘Debit’ and ‘Credit’ as discussed above refer to modem approach in accounting. These rules may be summarised as under :

Increase in assets and expenses (losses), and decrease in liability,” capital and revenue (profit), decreases proprietor’s claim against business, so it is debited. In the same way, decrease in assets and expenses (loss) and increase in liability, capital and revenue (profit) will increase proprietor’s share in the business and thus credited. 

  • Conventional approach towards ‘Debit’ and ‘Credit’

In addition to accounting concepts and assumptions, there are certain accounting conventions which we have to follow to make accounting uniform, comparable and meaningful. We follow certain conventions regarding ‘Debit and Credit’ which are as under:

(i) The left hand side of every account is debit and the right hand side of the account is credit.

(ii) In case of Journal and Trial Balance the amount column is divided in two parts. The left part of the amount column is Debit and the right part is Credit.

(iii) While passing journal entries, we use the term ‘Dr’, the short form of ‘ Debit’, ‘ Debtor’ against the accounts debited but do not use the word credit against accounts credited.

(iv) All receipts are debited and all payments are credited.

(v) All expenses and losses are debited but income and gains are credited.

(vi) Increase in the assets is debited, whereas increase in liability is credited.

(vii) The assets side of the Balance Sheet represents debit, whereas the liabilities side shows credit.