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 Debit the Receiver & Credit the giver [Personal Account] Personal Accounts Jose, cyndie or any other person or any companys account in business Debit all the Expenses and losses & Credit all the Incomes and gains. [Nominal Account] Nominal Accounts All Income, Expenses, Profit, Losses Accounts

(2)

(3)

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 thats why well 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 companys name or any employees name or banks 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 companys name or any employees 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 companys name or any employees 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:Balance Sheet Assets Cash 50000 40000 47000 46500 41500 40500 39000 41500 Liabilities Notes Payable 7000 7500

Truck 10000 Computer 1000 Notes Receivable 5000 Inventory 1000 500

Capital

Equity

50000 500

Profit/ Retained earnings

Total

58000

Total

58000

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. Cash cr. Capital 50000 Truck 10000 Notes-p 7000 Comp. 500 Sales 2500 Notes-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 datas from our entries to cash account which are associated with cash.

Lets make another T