When it comes to accounting, there are two main important terms you should remember: debit and credit. It is important to see which account needs to be credited and debited. There are three golden rules of accounting that every business owner should know.
The more you understand them, the better you will be able to ensure systematic recording of financial transactions. If you need any help with financial management in your business, CPA in Southwest Florida can assist you. They can also explain these three golden rules to you.
Golden rules of accounting
Debit the receiver, credit the giver.
This rule is used when handling personal accounts. When a person gives money to the organization, it becomes an inflow. You need to debit the account when you receive something and credit the account when you send something. This can better be explained with an example. Suppose you own a stationery store and purchased notebooks worth $500 from the company XYZ. Now, you need to debit your purchase account and credit the company XYZ.
Debit what comes in, credit what goes out.
The rule is associated with real accounts. Real accounts record the transactions related to your assets and liabilities. This can include your furniture, car, house, machinery, etc. It can also include intangible assets like goodwill, patents, and copyright.
Real accounts are also called permanent accounts and do not close at the end of the year. When something comes to your business, debit the account and vice versa.
For example, when you buy furniture, credit your cash account and debit your furniture account.
Debit expenses, credit income.
This rule deals with nominal accounts. A nominal account records transactions related to business income, expenses, profit, and losses. These are also called temporary accounts and are closed at the end of an accounting year. Debit your nominal account when your business makes an expense or suffers a loss. When your business experiences an income or gain, make sure to credit the account.
For example, suppose you make a purchase from a company. To record the transaction, debit the expense and credit the income.
These are the golden rules of accounting. As you can see, you need to understand different types of accounts and then apply the rules. You can better organize your financial statements by recording every transaction based on these rules.
If you are on the hunt for a simpler way of tracking your expenses, hire an account in Southwest Florida today. With a professional by your side, you can move your focus to more important things, such as growing your business.