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Golden Rules, the Crux of Accounts

Utpal Kanti Sen
29/05/2022 0 0

Post: 2

In the last post, the three golden rules of Accounts were mentioned. Now let's explain each golden rule separately:

1. Debit what comes in, Credit what goes out

Here "comes in" & "goes out" mean what is coming in to you and what is going out of you respectively.

(i) Say, a book worth Rs  500 has been bought by you. It means you have got a book in exchange of which you have paid Rs. 500, say in Cash. Then let's see what has come in and what has gone out. After making the payment, the book is now with you, I.e., book has come in. Now let's see what has gone out. You have paid cash, i.e., cash has gone out. Now let's record the transaction:

Debit: Book a/c (come in)                500

Credit: Cash a/c (gone out)                             500

You may watch both these two heads of account are asset which means you are the owner. So, we shall say that this 1st golden rule relates to asset, i.e., debit when an asset comes to your ownership and credit when an asset goes out of your ownership. Such asset account are termed in Accountancy as "Real a/c".

(ii) Let's consider another example. Say, you have Rs.800 in your pocket. So, you are now owner of this sum, i.e., you have "Cash in Hand" Rs.800. Let's for the time being, forget about how you have got this amount.  Since you are the owner of this sum, this "Cash in Hand" is your asset, i.e., a debit item. Now say, you purchase a book by Rs. 300 in cash. As per the earlier example, if this transaction is put into record, what will be your entry in books of account?

Debit: Book a/c (come in)                300

Credit: Cash a/c (gone out)                             300

Now how much cash you have now? Rs. 500 (800-300). In accounting perspective, how the debit item has come down? Cash in Hand (Rs. 800) was your debit item. You have credited cash by Rs. 300, thereby, your debit balance of Cash in Hand has been reduced to Rs  500 by the credit of Rs. 300 and you have now in  your pocket Rs. 500. You see your asset value was Rs. 800 in the form of Cash in Hand. Now, after buying this book, although your cash balance has come down to Rs.500, but your total asset value has remained unchanged. Now your assets consist of:

Book Rs. 300

Cash in Hand Rs. 500

Total Asset Value: Rs.800 

It means part of asset has been converted to another form of asset keeping the total asset value same.

We shall remember that for a single transaction, one or more or all the golden rules may have to be applied. So, please continue reading the subsrquent posts. Coming back in next post with 2nd golden rule.

 

 

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