Accounting – Rules of Accounting
Let us revisit the rules of accounting. I had covered these in an earlier post:
Double entry accounting is based on three fundamental rules, which ultimately apply to every and all parts of every transaction you can think of. What are these rules?
- Debit what comes in, credit what goes out
- Debit all expenses and losses, credit all incomes and gains
- Debit the receiver, credit the giver
Different authors of accounting articulate these in different sequences, but it does not matter.
Let us make an attempt to understand each of these.
Debit what comes in, credit what goes out
As the terms of this rule suggest, it deals with the physical movement of either money or a substance measured in terms of money. Simplest of transactions, you buy a pack of chips from a grocery store. For you this is a personal purchase and what is going out from your perspective? Money or Cash. So in your books you will credit the Cash Account.
What will you debit? Ah, a crucial point here, technically what is coming in is a pack of chips. But for you this is not a business transaction. I am presuming that you used cash from the business to make this transaction. So, the credit will not form a part of this rule. This could be an expense if you treated this as a business expense, like for entertaining a client. Or you could debit based on a personal account, since you are the receiver of the item purchased. As we said that this expense was for personal purposes, and its cash for my business that I used, so I will debit either my capital account or my drawing account.
For non-accountants, we will cover the drawing / capital accounts a little later.
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