Let’s talk a little bit on accounting today. If you have been from the commerce stream, you would have heard of the three golden rules, the rules defining debit and credit. Quite often when I interview resources, those that have done B.Com. or those that have done an MBA finance, believe me most cannot either state these or even have an understanding of these.

These rules are:

  • Debit what comes in, credit what goes out
  • Debit the receiver and credit the giver
  • Debit all expenses and losses, credit all incomes and gains.

In reality, these are more like six rules.

So, if I look at the entry for invoice processing, what will it be?

For a credit purchase of $ 2,000:

Purchase Account Dr.                        $ 2,000

To Vendor A/c                         $ 2,000

So, what have you done, purchases are coming in, so you debited the purchases account and the vendor is giving you the material you purchased, so you credited the giver.

For a cash / bank purchase of $2,000 your entry would be:

Purchase Account Dr.                        $ 2,000

To Cash / Bank A/c                            $ 2,000

So, what have you done, purchases are coming in, so you debited the purchases account and cash / bank amount is going out, so you credited what goes out.

Simple principles. Every ERP works on these. If you understand them, accounting will be easy, and these are fundamental things, your clients expect you to know.

Keep these rules handy, as I will refer to them quite often in my blog.