The Golden Rule in life states that you should treat people how you want to be treated. However, did you know that there is also a golden rule for accounting? there are actually three. And no, none of them are handling your accounts in the manner that you would prefer.
Journal Entries | Accounting | Rules of Debit and Credit.
What are debit and credit?
A debit is a line item that raises assets or expense accounts in a journal entry. Debits decrease a companys funds. A credit, on the other hand, is a line item that raises the liability or equity accounts. They increase a companys funds. In accounting, credit is the equal opposite of debit.
What is a journal entry?
Using debits and credits, a journal entry is a type of record used in accounting to keep track of financial transactions. In a company’s official accounting record book, the general journal, accountants enter journal entries. Accounting professionals can prepare and analyze balance sheets and income statements with the aid of accurate journal entries. The multiple types of journal entries may include:
Three golden rules of accounting
The three traditional rules of accounting, also referred to as the rules of debit and credit, are three of the most fundamental guidelines used to help track the revenue and expenditures of accounts. They help bookkeepers and accountants remember which details to include in which columns of a journal entry. They include:
1. The givers and receivers
Accountants use this rule when dealing with personal account transactions. The phrase says: Debit the receiver and credit the giver. This means that whenever you make a purchase or receive an invoice for a service, the company is being debited. The credit goes to the person who receives the payment or invoice.
2. The coming and going
Accountants use this rule with working with real accounts. Companies use these accounts, which by default have a debit balance, to transact business for equipment, real estate, building space, and other similar goods and services. Debit what comes in, credit what leaves, goes the saying. This means that any future purchases or payments will increase the account’s current balance, which is a debit. However, if you settle some of the outstanding balance, a credit is given to the other organization.
3. The losses and gains
Accountants use this rule when discussing nominal accounts. These types of accounts have a default credit balance in contrast to real accounts. At the conclusion of each accounting period, nominal accounts, also referred to as temporary accounts, are closed. The phrase says: Debit losses and credit gains. This means that any expenses paid will result in a debit, decreasing the amount in the account. Any additional earnings, however, are gains and are therefore credited to the account.
What are assets and liabilities?
Assets are items or services that increase a companys value. They may also benefit a companys operational procedures. Liabilities, on the other hand, are costs or payments that a business must make to a third party. Loans, mortgages, bonds, warranties, accounts payable, deferred revenue, and accrued expenses are a few examples of liabilities.
Three more journal entry rules to follow
When creating journal entries, accountants adhere to layout and style guidelines in addition to accounting principals. Some of these guidelines may include:
1. Number of accounts
Each journal entry in double-entry accounting needs to have two accounts, one credit and one debit. There is no restriction on how many additional accounts an accountant may include in a journal entry after the first two.
2. Format
Journal entries adhere to a set format so that anyone who reads the statements can comprehend the data. Most have between four and five columns that contain details like the transaction date, the transaction’s name and description, debits, and credits. Sometimes, each transaction may also have a reference number. These elements combine to create the ledger account. This format places the debits first or to the left and the credits second or to the right when listing all transactions in chronological order.
3. Amount totals
The total amounts of debit and credit within journal entries are consistently equal to one another. To maintain balance in the books, accountants include both columns in the journal entry.
Examples of journal entries
To demonstrate how accountants apply the rules when recording transactions, consider the following examples of straightforward journal entries:
Billing customers
One of their retail customers pays the Mail Box office supply company for $2,000 worth of goods. They are losing product but gaining cash. A journal entry for this transaction may look like:
DateItem/DescriptionDebitCredit3/23/21Cash payment$2,000
Accounts receivable
$2,000### Investing in stocks
Maxs Dog Bone company is investing $20,000 into a variety of company stock options They are giving cash and receiving stocks. A journal entry for this transaction may look like:
DateItem/DescriptionDebitCredit3/22/21Cash$20,000
Stocks
$20,000### Paying off a debt
For their monthly rent payment, Tacos Galore sends the building’s landlord a check for $600. The landlord wont cash the check for two weeks. The funds are being transferred from the Tacos Galore account to the landlord’s account. A journal entry for this transaction may look like:
DateItem/DescriptionDebitCredit3/24/21Accounts payable$600
Landlords account
$600### Purchasing a new vehicle
Palmer Construction purchases a new company vehicle for $4,000. They are giving cash and receiving a vehicle. A journal entry for this transaction may look like:
DateItem/DescriptionDebitCredit3/25/21Vehicle$4,000
Cash
$4,000### Purchasing equipment
A brand-new bottle capping device is being rented by the Pop Bottle company for $6,000 per month. Both the equipment and the payment are entering the business. A journal entry for this transaction may look like:
DateItem/DescriptionDebitCredit3/26/21**Bottle capping machine (March) $6,000
Cash
$6,000### Purchasing materials
Sunny Statement sunglasses company purchases $600 worth of steel to test an alternative method of making screws and fasteners The steel company wont collect payment for another week. They are giving cash for materials. A journal entry for this transaction may look like:
DateItem/DescriptionDebitCredit3/27/21Cash$600
Accounts payable
$600
FAQ
What are the golden rules for journal entry?
…
- Debit the receiver and credit the giver. …
- Debit what comes in and credit what goes out. …
- Debit expenses and losses, credit income and gains.
What are the 4 components of a journal entry?
- 1.) The date the transaction occured.
- 2. (Debit- The name of the account that was debited and the amount debited.
- 3. ) Credit Credit- The name of the credited account and the credit amount
- 4. ) Source Document Source Document- The source document number
What is the rule of passing journal entry?
The rule for passing a journal entry is that there must be at least two accounts, each with a debit and credit amount. The debit amounts will always equal the credit amounts.
