Nature of Account
The accounting equation is a statement of equality between the debits and the credits. The rules of debit and credit depend on the nature of an account. For this purpose, all the accounts are classified into the following five categories in the accounting equation approach:-
- Assets Accounts
- Capital Account
- Liabilities Accounts
- Revenues or Incomes Accounts
- Expenses or Losses Accounts
If there is an increase or decrease in one account, there will be equal decrease or increase in another account. Accordingly, the following rules of debit and credit in respect of the various categories of accounts can be obtained.
The rules may be summarized as below:-
- Increases in assets are debits; decreases in assets are credits.
- Increases in capital are credits; decreases in capital are debits.
- Increases in liabilities are credits; decreases in liabilities are debits.
- Increases in incomes and gains are credits; decreases in incomes and gains are debits.
- Increases in expenses and losses are debits; decreases in expenses and losses are credits.