A business undertakes innumerable transactions during an accounting period which are recorded and then analysed in order to determine their impact on the financial position of the business. The recording of such transactions are done according to generally accepted accounting rules.
Accounting rules are statements that establishes guidance on how to record transactions. As per accounting rules all the accounting transactions should be recorded in the books of entity using double entry accounting method. Double entry accounting method means for each transaction two (or more) accounts are involved, one account shall be debited and the other account shall be credited with the same amount.
Golden rules of accounting are the cornerstone of the entire accounting process. By providing the basis for recording transactions, these rules help in the systematic presentation of financial statements. Using them, one can easily record expenses and income, thereby facilitating better management of business accounts book.
However, many learners of the basics of accounting get confused while applying the golden rules for debit and credit to some business transactions.
For e.g. :-
1. There is a business with name “B”. There is a person, name ‘Mr.A’ who owes INR 10000 to the business “B”(means the business has account INR 10000 receivable from Mr.A). Now there is one more person name “Mr.C” who owes the same amount to Mr.’A’.
Mr.A and Mr.C reach out to the business ‘B’. By mutual understanding among the three parties, they agreed that Mr.C will pay to the business ‘B’ on behalf of Mr.’A’.
However, what will be the Entry to be made in the books of the business ‘B’.
Problem: – Rules for personal type of account says, “DEBIT THE RECEIVER”.
But in the above case right now Mr.’C’ does not seem to be a RECEIVER.
2. A business has been running well for a long time. Owner decided to calculate the Goodwill and show it in the books of accounts.
Now, what will be the Journal Entry to be made in the books of the business ?
Problem for the learner to apply the golden rules of Debiting and Crediting the accounts as per Double Entry accounting System‘: –
Goodwill A/c is a Real type of account
Rules for Real type of account says, “DEBIT WHAT COMES IN”.
But in the above case, the ‘goodwill’ is not seem to be coming In the business.
The present method relates to modified rules to understand the Double Entry Accounting System and/or to remove difficulties in application of prevailing rules.
Modification in the Golden Rules of Debit and Credit.
1] For Personal Type of Accounts.
Debit the Receiver/Receivable – (here ‘receivable’ means debit the personal account from who amount becomes receivable, although right now not seem to be Receiver)
Credit the Giver/Payable – (here ‘payable’ means credit the personal account to whom amount becomes payable, although right now does not seem to be Giver)
2] For Real Type of Accounts.
Debit What Comes In/Increases – (here ‘Increases’ means debit the ‘Real account’ value of which increases although right now it is not coming in the business)
Credit What Goes out/Decreases – (here ‘Decreases’ means credit the ‘Real account value of which decreases although right now it is going out from the business)
3] For Nominal Type of accounts :- (There is NO modification needed to the prevailing Rules of Nominal type of accounts, for better understanding of debit-credit effect to such type of accounts)
DISCLAIMER :- The above modification is authors own views, there may be different views by different institutions or organizations authorized for the accounting systems.