3 Golden Rules of Accountancy

3 GOLDEN RULES OF ACCOUNTANCY (1) Debit What comes in & credit what goes out [Real Account] Real Accounts – All tangible assets like cash, car, furniture and intangible assets like goodwill, patents (2) Debit the Receiver & Credit the giver [Personal Account] Personal Accounts – Jose, cyndie or any other person or any company’s account in business (3) Debit all the Expenses and losses & Credit all the Incomes and gains. Nominal Account] Nominal Accounts – All Income, Expenses, Profit, Losses Accounts Note:- (1) Debit if there is a decrease in liability and credit if there is an increase in Liability (2) Debit if there is an increase in assets and credit if there is a decrease in Assets Examples:- (1) Capital Brought in Business $50000 (cash) Cash 50000 Equity/capital 50000 We debited cash because cash is a Real Account and it is coming in the business (Debit what comes in), Capital is a Personal account and the owner is giving the cash(credit the giver) to business that’s why we’ll credit Capital or Equity ] (2) Truck Purchased for $10000 cash Truck 10000 Cash 10000 [we debited Truck because Truck is a Real Account and it is coming in (debit what comes in) the business, we credited cash because it is also a Real Account but it is going out of Business (credit what goes out)] 3) Borrowed $7000 cash from bank Cash 7000 Notes payable 7000 [We debited Cash because cash is a Real Account and it is coming in the business (debit what comes in), we credited notes payable because Notes Payable is Personal Account (coz it is associated with a person or any personal account like a company’s name or any employee’s name or bank’s name) and when we are giving notes to bank in return of the cash received from bank. (Credit the giver)] and notes payable is an increasing liability in this case so we can recheck it with Note (1). 4) Purchased Computer worth $1000 with down payment of $500 and $500 loan Computer 1000 Cash 500 Notes Payable 500 [We debited Computer because computer is a Real Account and it is coming in the business (debit what comes in), we credited Cash because it is a Real Account and it is going out of business (credit what goes out), We credited Notes Payable because Notes Payable is Personal Account (coz it is associated with a person or any personal account like a company’s name or any employee’s name) and when we are giving notes to bank in return of the cash received from bank. Credit the giver)] and notes payable is an increasing liability in this case so we can recheck it with Note (1). (5) Lend $5000 Cash to an employee for notes Receivable Notes Receivable 5000 Cash 5000 [We debited Notes Receivable because Notes Receivable is Personal Account (coz it is associated with a person or any personal account like a company’s name or any employee’s name) and when we are receiving notes from employee in return of the cash paid to him. Debit the Receiver)] and notes Receivable is an increasing Asset in this case so we can recheck it with Note (2). We credited cash coz it is a Real Account and it is going out of business (Credit what goes out). (6) Purchased 1000 units of Inventory of $1 each Inventory 1000 Cash 1000 [We debited Inventory because Inventory is a Real Account and it is coming in the business (Debit what comes in), we Credited Cash because Cash is also a Real Account and it is going out of our business (Credit what goes out)] 7) Pay $1500 in Salaries Salaries Expense 1500 Cash 1500 [We debited Salaries Expenses because Salaries is a Nominal Account and It is an expense (Debit all the expenses and losses), We Credited Cash because Cash is a Real Account and it is going out of our business (Credit what goes out)] (8) Sell 500 units of Inventory for $5 each which we bought for $1 each Cash 2500 Sales Revenue 2500 Cost of Goods Sold 500 Inventory 500 In the first entry we debited Cash because Cash is a Real Account and it is coming in the business buy selling inventories (debit what comes in) , We credited Sales Revenue because Sales revenue is a Nominal Account and we are gaining money through sales. (Credit all the Incomes and gains). In the second Entry We debited Cost of goods sold is a Nominal Account and its cost is an expense for business (Debit all the expenses and losses) , We credited Inventory because Inventory is a Real Account and it is going out of the business (Credit what goes out). ] Lets make a Balance Sheet for all the entries we understood above:-

AssetsCash 50000 40000 47000 46500 41500 40500 39000 41500Truck 10000Computer 1000Notes Receivable 5000Inventory 1000 500| LiabilitiesNotes Payable 7000 7500 EquityCapital 50000Profit/ 500Retained earnings| Total 58000| Total 58000| Balance Sheet INCOME STATEMENT INCOME Sales 2500 EXPENSES Salary 1500 Cost of goods sold 500 PROFIT OR LOSS Profit 500 Lets understand how to make T accounts. Dr. Cashcr.

Capital 50000 Truck 10000 Notes-p 7000 Comp. 500 Sales 2500Notes-R 5000 Inventory 1000 Salary 1500 Total 59500 Total 18000 Dr. bal. 41500 * T account is just picking the data from the journal entries which we passed already and put into a T format in which left hand side part of T column is Debit Column (Dr. ) and Right hand side Column is (Cr. ) * The name of Account is on the top of T and in between of both the sides. * We are talking about Cash account as an example, which is the most common account. * Look up the entries above, first entry is when Owner brought up the capital in business, our entry was :- Cash 50000 Capital/equity 50000 Capital is in the credited in the entry so put it into debit side of the T account of that particular account. (Apply the same with all the entries associated with cash) * Second entry is about purchasing a Truck for 10000 Truck 10000 Cash 10000 * In this entry truck is debited so put it into credit side of the T account of Cash. * Third Entry was about borrowing cash from bank (7000) our entry was:- Cash 7000 Notes payable 7000 * In this entry Notes payable is credited so put it into Credit side of the T account. * Similarly We have to put all the data’s from our entries to cash account which are associated with cash. Lets make another T