It’s no secret that the world of accounting is run by credits and debits. Debits and credits make a book’s world go ‘round.
Before we further and read the golden principles of accounting, you need to reread all the things regarding debit and credit.
Debits and credits are of equal amount but entries are in opposite columns in accounting books. Credits and debits influence the five key types of accounts:
· Assets: Resources of a business which have economic value that can be converted in cash some e.g are Vehicles, Machinery, land and building.
· Expenses: Costs that occur during day to day operations of the business( wages and raw materials)
· Liabilities: Amount that you have to pay to other person or business.
· Equity: Value of Your assets minus your liabilities
· Income and revenue: Cash earned from sales
A debit is an entry made on the left side of an account. Debits increase an asset or expense account or decrease equity, liability, or revenue accounts.
A credit is an entry made on the right side of an account. Credits increase equity, liability, and revenue accounts and decrease asset and expense accounts.
You should record credits and debits for each transaction.
The golden rules of accounting also go around debits and credits. Let’s take a look at the three main rules of accounting:
1. Debit the receiver and credit the giver
The rule of debiting the receiver and crediting the giver comes into play with personal accounts. A personal account is a general ledger account pertaining to individuals or organizations.
If you receive something, debit the account. If you give something, credit the account.
2. Debit what comes in and credit what goes out
For real accounts, use the second golden rule. A real account can be an asset account, a liability account, or an equity account.
Real accounts are also referred to as permanent accounts. Real accounts don’t close at year-end. Instead, their balances are carried over to the next accounting period.
With a real account, when something comes into your business (e.g., an asset), debit the account. When something goes out of your business, credit the account.
3. Debit expenses and losses, credit income and gains
The final golden rule of accounting deals with nominal accounts. A nominal account is an account that you close at the end of each accounting period. Nominal accounts are also called temporary accounts. Temporary or nominal accounts include revenue, expense, and gain and loss accounts.
With nominal accounts debit the account if your business has an expense or loss. Credit the account if your business needs to record income or gain.