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Golden Rules, the Crux of Accounts (contd. from Part 2)

Utpal Kanti Sen
21/06/2022 0 0

Part 3: In Part 2, the mechanism of the 1st golden rule being, "Debit what comes in, credit what goes out", was discussed. It was also mentioned that a single transaction might require the application of more than one golden rule or all the golden rules. We have already understood that this 1st golden rule relates to assets which in accounting parlance is "REAL ACCOUNT". In continuation, we will now proceed with the 2nd golden rule.

2nd golden rule: "Debit the Receiver, Credit the Giver".

The words "Receiver" and "Giver" themselves indicate a person who is receiving or is giving, i.e., a person is receiving or giving. Therefore, this rule handles a person, i.e., in accounting terminology, is "PERSONAL ACCOUNT".

Before going into a deep explanation, let it be clear that for an increase in value of any specific debit head of account, that head is to be debited and vice versa. In the case of credit head, the rule is the same, i.e., there is no scope of any arithmetical addition or reduction, but by passing entries only. 

Now, let's explain.

Say you have given Rs. 500 to Mr X. If you want to record this transaction, you will have to follow the golden rules. As soon as you pay Rs. 500, cash goes out of your hand. Cash is an asset, i.e., a Real account. For real a/c, when an asset goes out, the head is credited. Since cash (real a/c) has gone out, Cash a/c will be credited. Therefore, here we have followed one part of the 1st golden rule.

Since for recording any transaction, there shall be at least one debit and one credit, we will have to see what will be the debit. Here, you see Mr X has got the amount, i.e., Mr X is the receiver. As per the 2nd golden rule, debit the receiver, "X" a/c will have to be debited. You see an identical amount has been found for debit and that for credit, i.e., the transaction is complete. Now put this transaction in journal form:

Debit: Mr X (debit the receiver: 2nd rule) 500

Credit: Cash a/c 

(credit what goes out: 1st rule) 500

Till you get the money back, X will remain indebted to you. In the accounting system, X is now debtor to you. The debts which persons owe to you, i.e. receivable from others, are your debtors (Personal a/c). 

Let's go to the next example.

Say you have taken a loan from YY Bank Rs.1000, and YY bank has given the sum to you in cash. You have received cash Rs.1000. Cash is your asset, as discussed earlier, which has come into you. Therefore, as per the 1st golden rule, Cash a/c shall be debited by Rs. 1000. Now, who has given the amount to you? YY bank. So, YY Bank is the giver. Therefore, as per the 2nd golden rule being credit the giver, YY Bank shall be credited by Rs. 1000. Let's record the transaction now:

Dr Cash (1st rule) 1000

Cr. YY bank (2nd rule) 1000

So till you repay the entire amount, you owe the sum to YY bank. Therefore, YY bank remains your creditor (Personal a/c). 

You see, these two sets of transactions are recorded by following the 1st golden rule and 2nd golden rule simultaneously.

Now you also see, in the 1st example, Personal a/c stands as debit head, and in the case of 2nd one, Personal a/c stands in credit. It is, therefore, inferred that in the case of Personal a/c, in books of account, Personal a/c may stand as both debit and credit. But in the case of Real a/c, it is only the debit head.

In my next post, I will discuss Golden Rule No. 3. Should anybody has any query, please share.

 

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