The Problem with Debit Credit Rules :
The system of debit and credit is right at the foundation of dual entry system of bookkeeping. It is very profitable, however at the same time it is very hard to utilize in reality. Consider the system of debits and credits may need an experienced employee. However, no company can manage such harmful waste of cash for record keeping. It is normally done by clerical staff and people who work at the store. Therefore, golden rules of accounting were prepared.
Golden rules convert complex bookkeeping rules into a set of principles which can be simply studied and applied.
Here is how the system is applied :
Ascertain the Type of Account :
The golden rules of accounting needed that you ascertain the type of account in question. Every account type has its rule that requires to be applied to account for the transactions. The golden rules have been listed below :
The Golden Rules of Accounting :
Debit The Receiver, Credit The Giver :
This principle is used for personal accounts. When a person afford something to the organization, it becomes an inflow and therefore the person must be credited in the books of accounts. The exchange of this is also true, which is why the receiver requires to be debited.
Debit What Comes In, Credit What Goes Out :
This principle applies to real accounts. Real accounts associate machinery, land and building etc. They have a debit balance by default. Thus when you debit what comes in, you add to the existing account balance. This is absolutely what requires to be done. Equivalently when you credit what goes out, you are decreasing the account balance when a tangible asset goes out of the organization.
Debit All Expenses And Losses, Credit All Incomes And Gains :
This rule applies when the account in question is a nominal account. The capital of the company is a liability. Therefore it has a default credit balance. When you credit all incomes and profits you increase the capital and by debiting expenses and losses, you decrease the capital. This is absolutely what requires to be done for the system to stay in balance.
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