Rule of Debit and Credit ( Under Modern Approach)

Under the Modern approach, all the accounts are classified into the following five categories mentioned below:

1. Assets Account: An increase in the amount of any asset is recorded on the debit side of the assets account whereas any decrease in the amount of an asset will be recorded on the credit side of the asset account.

2. Liabilities Account: When there is an increase in any of the liabilities, it is recorded on the credit side of that particular liability and when there is a decrease in the liability, it is recorded on the debit side of the liabilities account. 

3. Capital Account: An increase in the capital is recorded on the credit side and the decrease in the capital is recorded on the debit side.

4. Revenue or Income Account: All increases in the gains and incomes will be recorded on the credit side as it leads to an increase in capital and all decreases in the gains and income will be debited in that particular account as it reduces capital. 

5. Losses or Expenses Account: All increases in the losses and expenses are recorded on the debit side and all decreases in the losses and expenses will be recorded on the credit side.

The accounting equation is the foundation of double-entry accounting, representing the relationship between a company’s assets, liabilities, and equity. Business is run through transactions. Transactions are financial in nature and they affect the financial position of any business. Every transaction increases or decreases Assets, Liabilities, or Equity. The entire accounting structure is based on these three items. A business receives its fund from proprietors & creditors and invests those funds to acquire assets. This shows that the amount of capital and liabilities will be equal to the total amount of assets.