AccountsISC Class 11 · Accounting Equation and Journal

Accounting Equation and Rules of Debit and Credit: ISC Class 11 Accounts

Updated 17 October 2026 · Fact-checked

The accounting equation is Assets = Capital + Liabilities, and every transaction keeps it balanced. Under double entry, each transaction is recorded as a debit in one account and an equal credit in another: debit the receiver and credit the giver (personal), debit what comes in and credit what goes out (real), debit expenses and losses and credit incomes and gains (nominal).

Assets sit on the debit side, while capital and liabilities sit on the credit side; add expenses and losses to debit, and income and gains to credit.

Illustration drawn for QuestionBuddy.

Understand Accounting Equation, Classification of Accounts and Rules of Debit and Credit

Accounting equation. Assets = Capital + Liabilities (or Capital = Assets - Liabilities). A transaction changes the equation in one of these ways: both sides rise, both fall, or one item on a side rises while another on the same side falls. Profit increases capital; drawings and losses decrease it.

Traditional classification.

*Personal accounts:* persons, firms, companies, institutions (natural, artificial, representative personal such as outstanding rent).
*Real accounts:* assets and property (cash, machinery, goodwill).
*Nominal accounts:* expenses, losses, incomes and gains (wages, interest received).

Rules (traditional). Personal: debit the receiver, credit the giver. Real: debit what comes in, credit what goes out. Nominal: debit all expenses and losses, credit all incomes and gains.

Modern classification. Assets, liabilities, capital, revenue (income) and expenses.

Rules (modern). Debit increase in assets and expenses, decrease in liabilities and capital; credit increase in liabilities, capital and income, decrease in assets. Memory frame: *Debit = Assets, Expenses, Drawings, Losses; Credit = Liabilities, Capital, Income, Gains.*

Double entry system. Every transaction has two aspects; total debits always equal total credits. Advantages: complete record, arithmetical check by the trial balance, preparation of final accounts, detection of errors and frauds.

Steps of analysis. (1) Identify the accounts involved. (2) Classify each (asset, liability, capital, income, expense). (3) Decide whether each increases or decreases. (4) Apply the rule and mark debit or credit. Total debit = total credit.

Accounting Equation, Classification of Accounts and Rules of Debit and Credit: key facts

Accounting equation: Assets = Capital + Liabilities | Capital = Assets - Liabilities; Always balanced.
Traditional rules: Personal Debit receiver, credit giver
Real Debit what comes in, credit what goes out
Nominal Debit expenses and losses, credit incomes and gains; Golden rules.
Modern rules: Debit: increase in assets, expenses, losses; decrease in liabilities, capital | Credit: the opposite; Normal balances.

Personal	Debit receiver, credit giver
Real	Debit what comes in, credit what goes out
Nominal	Debit expenses and losses, credit incomes and gains

How to answer Accounting Equation, Classification of Accounts and Rules of Debit and Credit questions

For each transaction analyse the two accounts before writing an entry.

1Name the two accounts and classify them.
2Decide increase or decrease for each.
3Apply the rule to decide debit or credit.
4Check that the two amounts are equal.

Accounting Equation, Classification of Accounts and Rules of Debit and Credit in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Debit and credit by rule

Suppose a tuition centre buys a projector for Rs 24,000 and pays by bank transfer.

Which account is debited and which is credited?

Try it first, then show the solutionSolution

The projector comes in: real account, debit Rs 24,000.
Bank money goes out: asset decreases, credit Rs 24,000.

Answer: Debit Projector, credit Bank, Rs 24,000.

Memory hook: What comes in is debited.

Tricks to remember Accounting Equation, Classification of Accounts and Rules of Debit and Credit

Short memory aids. Say each one aloud once, then use it on a question the same day.

DEAD CLIC
Debit: Expenses, Assets, Drawings; Credit: Liabilities, Income, Capital.
Use it when: Modern rules.
Receiver is debit
The person who receives value is debited.
Use it when: Personal accounts.
Real in, nominal loss
In: debit; Out: credit. Expense and loss: debit.
Use it when: Rules.

Accounting Equation, Classification of Accounts and Rules of Debit and Credit: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Nature of account · 1 mark · MCQBoard level

Outstanding rent is which kind of account?
(a) Real (b) Nominal (c) Representative personal (d) Capital

Try it first, then show the solutionSolution

Outstanding rent is owed to the landlord, so it is a representative personal account.

Answer: (c) Representative personal

Example 2: Classify and apply rule · 4 marks · Short answerBoard level

Classify under both systems and state the rule: (i) Purchased goods from Ravi on credit (ii) Paid wages (iii) Received commission (iv) Owner brought Rs 50,000 cash. (4 marks)

Try it first, then show the solutionSolution

(i) Purchases (nominal/expense) debit; Ravi (personal/liability) credit.
(ii) Wages (nominal/expense) debit; Cash (real/asset) credit.
(iii) Cash debit; Commission received (nominal/income) credit.
(iv) Cash debit; Capital (personal/capital) credit.

Answer: (i) Dr Purchases, Cr Ravi; (ii) Dr Wages, Cr Cash; (iii) Dr Cash, Cr Commission; (iv) Dr Cash, Cr Capital.

Example 3: Transactions and the equation · 6 marks · Long answerHarder board level

Opening: Cash Rs 60,000, Stock Rs 40,000, Furniture Rs 50,000, Creditors Rs 30,000, Capital Rs 1,20,000. Show the effect of (a) paying Rs 10,000 to creditors, (b) buying goods for Rs 15,000 on credit, (c) sale of stock costing Rs 8,000 for Rs 12,000 cash, (d) drawings Rs 5,000. Give the final equation. (6 marks)

Try it first, then show the solutionSolution

Start: assets 1,50,000 = capital 1,20,000 + creditors 30,000.
(a) Cash -10,000, creditors -10,000: assets 1,40,000, creditors 20,000.
(b) Stock +15,000, creditors +15,000: assets 1,55,000, creditors 35,000.
(c) Cash +12,000, stock -8,000: assets 1,59,000; profit 4,000: capital 1,24,000.
(d) Cash -5,000, capital -5,000: assets 1,54,000, capital 1,19,000.
Final: 1,54,000 = 1,19,000 + 35,000.

Answer: Assets Rs 1,54,000 = Capital Rs 1,19,000 + Creditors Rs 35,000.

Example 4: Missing figures · 4 marks · Short answerHarder board level

A trader had assets Rs 5,00,000 and liabilities Rs 1,80,000 at the start of a year. At the end, assets were Rs 6,40,000 and liabilities Rs 2,10,000. He introduced Rs 40,000 capital and withdrew Rs 50,000 during the year. Find the profit. (4 marks)

Try it first, then show the solutionSolution

Opening capital = 5,00,000 - 1,80,000 = 3,20,000.
Closing capital = 6,40,000 - 2,10,000 = 4,30,000.
Closing = Opening + Additional + Profit - Drawings: 4,30,000 = 3,20,000 + 40,000 + P - 50,000, so P = Rs 1,20,000.

Answer: Profit Rs 1,20,000.

Example 5: Debit side puzzle · 3 marks · Short answerHOTS / competency

A student says: "Cash is increasing, so the cash account must be credited like capital." Correct the statement using both rule systems and give an example. (3 marks)

Try it first, then show the solutionSolution

Real rule: what comes in is debited; modern rule: an increase in an asset is a debit.
Capital is credited because it is an increase in a claim of the owner, not an asset.
Example: cash introduced by the owner: Dr Cash, Cr Capital.

Answer: Increase in cash is a debit; the credit goes to capital.

Where students lose marks in Accounting Equation, Classification of Accounts and Rules of Debit and Credit

The slips examiners see most often, and what to write instead.

Mistake: Reversing debit and credit for the giver
Mixing personal and real rules.
Wrong working
Dr Ravi, Cr Purchases (goods from Ravi)
Right working
Dr Purchases, Cr Ravi
Do this: Receiver of value debited; Ravi gave goods.
Usually costs: 2 marks.
Mistake: Debiting drawings to Profit and Loss
Looks like an expense.
Wrong working
Dr Salary, Cr Cash for the owner's personal use
Right working
Dr Drawings, Cr Cash
Do this: Drawings reduce capital.
Usually costs: 1-2 marks.
Mistake: Equation that does not balance
Forgetting profit on the sale.
Wrong working
Assets 1,59,000 = capital 1,20,000 + 35,000
Right working
Capital rises by profit of 4,000
Do this: Add the profit to capital.
Usually costs: 2 marks.

Exam tips

Always write the type of each account in brackets before applying the rule.
End equation questions with the balanced equation.
Put the narration only after the entry is fixed.

Practice questions on Accounting Equation, Classification of Accounts and Rules of Debit and Credit

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
A decrease in a liability is recorded as a:
(a) credit (b) debit (c) memo entry (d) narration
Hint
Opposite of an increase.
Answer
(b) debit
Q2 · 3 marks · Short answerBoard level
State the rules of debit and credit for personal, real and nominal accounts with one example each. (3 marks)
Hint
Golden rules.
Answer
Personal: debit the receiver, credit the giver (Ravi). Real: debit what comes in, credit what goes out (machinery). Nominal: debit expenses and losses, credit incomes and gains (rent).
Q3 · 6 marks · Long answerHarder board level
Capital Rs 2,00,000; Creditors Rs 50,000. Assets are cash 40,000, stock 60,000, machinery. Find machinery. Then show the equation after buying a machine of Rs 30,000 on credit and paying Rs 20,000 to creditors in cash. (6 marks)
Hint
Assets = 2,50,000.
Answer
Machinery = 2,50,000 - 1,00,000 = 1,50,000. After the machine: assets 2,80,000 = capital 2,00,000 + creditors 80,000. After paying 20,000: assets 2,60,000 = 2,00,000 + 60,000.
Q4 · 5 marks · Long answerHarder board level
The opening capital of a trader was Rs 1,60,000. In the year he earned a profit of Rs 55,000, drew Rs 20,000 and added Rs 25,000 as new capital. Liabilities at the end were Rs 90,000. Find total assets at the end and the effect on the equation of each item. (5 marks)
Hint
Closing capital first.
Answer
Closing capital = 1,60,000 + 25,000 + 55,000 - 20,000 = 2,20,000. Assets = 2,20,000 + 90,000 = Rs 3,10,000. Profit and new capital raise the equation; drawings reduce it.
Q5 · 4 marks · Short answerHOTS / competency
The owner pays his personal insurance premium Rs 3,000 by cheque from the business account. A clerk debits Insurance expense. Find the effect on profit and on capital if the clerk is not corrected, and give the correct entry. (4 marks)
Hint
Drawings.
Answer
Correct entry: Dr Drawings 3,000, Cr Bank 3,000. If uncorrected, the clerk's entry (Dr Insurance) overstates expenses by 3,000 and so understates profit by 3,000. Closing capital is unchanged, because profit is 3,000 lower and drawings are 3,000 lower, so the net effect on capital is the same. The Profit and Loss Account and the Drawings account are both wrong.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Modern debit items?Show answer
Assets, expenses, drawings and losses.
2.Golden rule for nominal accounts?Show answer
Debit expenses and losses, credit incomes and gains.
3.Outstanding rent is which account?Show answer
Representative personal.
4.Does profit increase capital?Show answer
Yes.
5.Total debits equal?Show answer
Total credits.

Accounting Equation, Classification of Accounts and Rules of Debit and Credit: frequently asked questions

Why is capital credited?

It is a claim of the owner, a liability to him.

Is drawings debit or credit?

Debit.

Do I use traditional or modern rules?

Either is accepted; be consistent.

Is goodwill real or nominal?

Real (an intangible asset).