Let us first understand how to interpret a Balance Sheet. (2/n)
While learning accountancy a student is taught to
👉Debit all expenses, credit all income.
👉Debit all assets, credit all liabilities.
👉Debit the receiver, credit the giver.
Why is it so?
Let us find out the rationale behind three golden rules of accounts. 👇🧵 (1/n)
Let us first understand how to interpret a Balance Sheet. (2/n)
Example: The customer from whom the amount was receivable (Debtor) will get converted into Cash the moment he pays money. (4/n)
Also, the businessman decides to take loan (Outsider’s money) to expand his business. So, the Balance Sheet will look something like this, (6/n)
Profit is calculated as ‘Income – Expenses’.
So, we now have,
Equity + Income – Expenses + Other liabilities = Assets
(8/n)
Equity + Income + Other liabilities = Assets + Expenses
This is a beautiful equation.
LHS shows us all the sources of money and RHS shows us its application. (9/n)
👉Debit all expenses, credit all income.
👉Debit all assets, credit all liabilities.
👉Debit the receiver, credit the giver. (11/n)
Tagging @FincademyIn, @FI_InvestIndia, @abhiandniyu, @VidyaG88 for better reach 🙏
