They say debit and credit is easy if you learn 3 golden rules of accounting. But the question is “Do accounting professionals agree with this?”. The answer is yes but up to a certain point. Debit and credits are the backbone of every accounting journal entry. If you learn debits and credits, you’ve already learned most of the accounting.
There are three Golden Rules of Accounting:
- Debit the Receiver, Credit the Giver (Personal Accounts)
- Debit What Comes in, Credit what Goes Out (Real Accounts)
- Debit All Expenses and Losses, Credit All Incomes and Gains (Nominal Accounts)
Sacred Accounting will explain each of these in detail with examples to make it clear for you.
Debit the Receiver, Credit the Giver
- This rule is applicable in case of personal accounts.
- Personal Accounts are accounts with which business dealing is done.
- For example, you are running NHIRKM engineers, then NHIRKM Engineers Account is your personal account.
- Similarly, all prepaid accounts and debtor accounts are personal accounts.
Now let’s discuss the golden rule, the rule says that the one who is in the receiving end should be credited whilst the one who is in the giving end should be debited while making a double entry.
NHIRKM Engineers sold inventory worth $5,000 to Smart Limited. As NHIRKM Engineers are paying and is called giver whilst Smart Ltd is receiving, so they are the receiver. According to the rule, we will Credit the Giver (NHIRKM Engineers) and will Debit the receiver i.e. Smart Ltd.
Debit What Comes in. Credit What Goes Out
- This golden rule is applicable in the case of Real Accounts.
- Real Accounts are accounts of Assets. (both tangible and intangible).
- Some examples of Tangible Assets are Furniture, Land, Buildings and Computer Hardware, etc.
- Some examples of Intangible Assets are patents, trademarks, Copyrights, and Goodwill, etc.
As long as this golden rule is concerned, the accountant should debit every tangible and nontangible asset their business is receiving whilst they should credit every asset they are loosing (selling out, disposing of).
Suppose NHIRKM Engineers is selling Land worth $70,000 to Smart Ltd. As the assets of NHIRKM Engineers is going out so it should credit the asset (Land), whilst as Smart ltd is paying them $70,000, it should credit Cash.
In this example,
- Cash is Coming in (Should be debited)
- And Land is going out (Should be Credited)
Debit All Expenses and losses, Credit all incomes and gains
- This golden rule of accounting is applicable in the case of nominal accounts.
- The nominal account is an account that relates to expenses, losses, incomes, gains, etc. of the business.
This golden rule states that a business should debit all the Expenses and losses and credit all incomes and gains.
- NHIRKM Engineers bought inventory worth of $50,000 from Smart Ltd.
- In this case, NHIRKM Engineers is incurring a business expense, so it should debit this expense in its books of accounts whilst as NHIRKM is losing Cash (a real account), it should credit Cash.
Conclusion of the Golden Rules of Accounting
- You only need to identify the type of accounts involved and,
- then apply any one of the three golden rules of accounting while making a double entry.