Real accounts, personal accounts & nominal accounts are the traditional approach of recording transactions but there is another approach of classification of accounts which involves recording of transactions on the basis of increase/decrease in the assets, liabilities, capital, expenses and revenues and that approach is known as the modern approach of accounting.
There are two approaches that define the rules of debit and credit. The first approach is the traditional approach of accounting and the second one is the modern approach. In the modern approach of classification of accounts the rules of debit & credit are framed taking into account the effect of the transactions on the assets, liabilities, capital, income & expenses of the business.
Rules of Debit & Credit
In the modern approach of accountancy rules of debit & credit are as follows:
Assets are the tangible resources or the intangible rights that is owned by the business entity for the purpose of generating revenue.
Rule: The increase in asset is debited and the decrease in asset is credited.
For example: if there is an increase in bank, plant & machinery, inventory then then these accounts are debited and in case of decrease, they are credited.
Liabilities are the financial business obligations other than the funds of owners.
Rule: The increase in liability is credited and the decrease is debited.
For example: if there is increase in trade payables, loan & advances payable then these accounts are credited otherwise debited.
Capital is the amount invested by the owners into their business. In case of corporates capital is the amount contributed by the shareholders in the company.
Rule: The increase in the capital account is credited and the decrease is debited.
For example: if there is increase in the capital contribution of the investor or increase in the amount of capital investment by the owner of the organization then the capital account is credited and otherwise credited ( such as drawings of the owner results in the decrease of capital account).
Expenses refer to the cost incurred by the business on their routine operations to generate revenue and losses are the excess of expenses incurred by the business over its revenues in an accounting year.
Rule: If the business enterprise incurs any expense or suffers any loss then such expense/loss account is debited whereas if there is any decrease in expense/loss account then the respective account is credited
For example: salary expense, rent paid, purchases of raw material, loss on sale of fixed asset etc., are debited when they are incurred whereas if there is any purchase return etc., then its respective account (purchase account) is credited.
Revenue refers to the income generated by the business in the course of normal business operations i.e. income from sale of goods or from rendering of services and also includes income generated from the use of business resources such as interest income, dividend income etc. and the gains are excess of revenue generated over the expenses of the business.
Rule: If any revenue is generated or if there is any gain in the business then such revenue/gain account is credited whereas if there is any decrease in the revenue/gain then the respective account is credited.
For example: Revenue from operations, interest income on fixed deposit, profit on sale of fixed asset etc. are credited when they are earned whereas if there is any sales return etc. then its respective account (sales account) is debited.
Thus, modern classification of accounts categorize the account items as assets, liabilities, capital, income & expense and every increase and decrease in these account item as a result of any business transaction is debited and credited as per the rule mentioned above.