Significance of Debit and Credit :

(a) Debit in Personal Accounts

(i) If the account is new, debit implies that the person whose account is being debited has become debtor of the business.

(ii) If the account is already there and the person whose account is being debited is already a debtor of the business, the new debit implies that the sum due from that person has increased.

(iii) If the account of a person who is a creditor of the business is debited, the debit implies that the amount due to that person has decreased by the amount of debit. It is also conceivable that the creditor may become a debtor after the debit entry; it will happen when the amount of the debit exceeds the amount for which the person was a creditor immediately before the debit.

(b) Credit in Personal Accounts

(i) If the account is new, credit implies that the person whose account is being credited has become creditor of the business.

(ii) If the account of a creditor of the business is credited, it will mean that the amount which is due to that person has increased by the amount of the fresh credit. Credit in the account of a debtor of the business signifies that the amount for which the debtor was liable to the business has diminished by the amount of the credit entry. It is also possible that a debtor may become a creditor after the credit.

(c) Debit in Real Accounts: A debit in real account means that either the value of the asset whose account is being debited has increased or the business has acquired more of that asset.

(d) Credit in Real Accounts: A credit in the real account implies that either the value of the asset whose account is being credited has decreased or the business has disposed of a part or the whole of the asset for the amount of the credit.

(e) Debit in Nominal Accounts: A debit in nominal account signifies that there has been an expense or loss of the amount of the debit or some income or profit has diminished by the amount of the debit.

(f) Credit in Nominal Accounts: A credit in a nominal account implies that there has been an income or a profit of the amount of credit or some expense or loss has diminished by the amount of the credit.

 

Illustration 1: From the following transactions, identify the nature of accounts involved and state which account will be debited and which account will be credited?

S. No.	TRANSACTION	ACCOUNTS INVOLVED	TYPE OF ACCOUNT	DEBIT/ CREDIT
1	Mr. Anil started business with ` 60,000.	Cash Account Capital Account	Real Personal	Debit Incomings Credit Giver
2	Purchased goods for cash ` 25,000.	Purchases A/c Cash Account	Nominal Real	Debit Expenses Credit Outgoings
3	Sold goods for cash ` 20,000.	Cash Account Sales	Real Nominal	Debit Incomings Credit Income
4	Purchased goods from Mr. Bansal for cash ` 10,000.	Purchases i.e. good the A/c Cash Account	Real Real	Debit Exp Credit Outgoings
5	Sold goods to Mr. Charles ` 8,000 on credit.	Charles Sales A/c	Personal Nominal	Debit Receiver Credit Income
6	Purchased furniture for ` 6,000	Furniture A/c Cash Account	Real Real	Debit Incomings Credit Outgoings
7	Paid rent ` 1,500	Rent Account Cash Account	Nominal Real	Debit Expenses Credit Outgoings
8	Paid wages	Wages A/c Cash Account	Nominal Real	Debit Expenses Credit Outgoings
9	Purchased goods from Ajit on credit	Purchases A/c Ajit	Nominal Personal	Debit Expenses Credit giver
10	Dividend received	Cash Account Dividend A/c	Real Nominal	Debit incomings Credit Income
11	Machinery sold	Cash Account Machinery A/c	Real Real	Debit incomings Credit Outgoings
12	Outstanding for salaries	Salaries A/c Outstanding Salaries A/c	Nominal Personal	Debit Expenses Credit given