Accounting – Rules of Accounting

Hope you enjoyed Christmas. http://faoblog.com/merry-christmas/

We revisited and detailed a part of the first rule.

http://faoblog.com/accounting-rules-accounting/

These rules are quite interlinked.  As per the reader, the seller of the pack of chips could be used. Well if the transaction was that I paid cash to the shopkeeper, with nothing else happening, he would have been the receiver.  Then I would have debited his business entity. Also, since he delivered the pack of chips, the transaction was closed, so, he had no obligation in future to return a monetary equivalent / money to me in future. He completed his obligation by delivering the chips packet.

Interesting, isn’t it? A simple purchase could look so complicated.

It’s not so, if you understand the fundamentals. Once you gain strength on understanding the fundamentals, every transaction will be easy.

The next rule is:

Debit all expenses and losses, credit all incomes and gains

This looks fairly simple. Any expenses and loses will be debited and any incomes and gains will be credited.

Let’s look at an example. The bank pays you interest and deposits the same to your bank account.

So, in your books you will credit “Interest Account”. Now what will you debit?

You received the money in your bank account, thus the bank account is the receiver, so you Debit the receiver.

Based on the query received from a reader, the banker is the giver, so why not credit the banker?

Again, the basic concept of entity comes into play. In my books, I have received the interest, which is an income for me. Also, the transaction is closed, I don’t need to return any value to the banker.

So, for this my entry will be:

Bank account                          Dr.     Rs. 1000

    To Interest from Bankers                                 Rs. 1000

Ideally, as you can see that we don’t use the debit and credit of the same rule, we use one debit and one credit, from any rule… I should say one or more…

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