Golden rules of accounting

Learn Debit and Credit

some times we got puzzled about understanding debit and credit, but to be true, it is comparatively easy. For a better understanding you can use the following logic….

Got stuck in figuring what to Debit and Credit? Yes, like some of you, even I used to get puzzled as well in my early days. By the time I would settle my understanding on golden rules of accounting: debit and credit, one or the other scenarios would again lead me back to zero and start my understanding afresh.

Instead of beginning with golden rules of accounting, let us register debit and credit as shown in the table.

From the above table, it’s clear that it is neither a theory nor a puzzling topic anymore - it’s just logic and reasoning. To summarize - Debit is all about incoming/deposits and Credit is all about outgoing/withdrawal.

For example, you purchased a computer by paying 25,000 by cash. Here, you are receiving a computer so it should be debited, and cash should be credited since it is going out.

Voila! You just recorded an accounting transaction even without looking at the golden rules of accounting.

Golden Rules of Accounting

With the above understanding, let us introduce the golden rules of accounting. Golden rules of accounting refer to a set of pre-defined principles which guides the sequential way of recording the transactions using double entry system of bookkeeping.

Looks bookish? Let us make it simpler with What, Who and Why -

Any scenarios of accounting entry must fall under any of these three broad categories

– What (Real), who (Personal) and Why (Nominal). So basically, it covers why (Nominal) a transaction has happened; what (Real) commodities are coming in or going out and who (Personal) is receiving or giving.

Going by this logic, the above transaction of computer purchase in simple language becomes –

1. Received What? Computer, hence debited

2. Paid What? Cash, hence credited

Let’s take one more example to be sure about it. Paid electricity bill of 5,000 in cash.

1. Why money has been paid? For Electricity expenses, hence debited.
   

2. Paid What? Cash, hence credited

Next time you are confused about debit and credit, just remember ‘What, Who and Why’

Types of Accounts

For all those who are still curious to know the definition of a real account, personal account and nominal account, here is the brief about it.

Example of the Golden Rules of Accounting

In the below example, we have listed different type of transactions along with the type of accounts and details of debit/credit after applying the accounting rules.