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swapnilkabra
@caswapnilkabra 4 years, 1 month ago 766 views

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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)

'Balance Sheet' and 'Profit & Loss Account' are two important aspects to learn accountancy.
Let us first understand how to interpret a Balance Sheet. (2/n)

Balance sheet is a simple snapshot of ‘Sources of funds’ (‘Liabilities’) and ‘Application of funds’ (‘Assets’) as on a ‘particular’ day. (3/n)

It is important to note that the Balance sheet may change every day. That’s because the liabilities side and the assets side may change frequently.
Example: The customer from whom the amount was receivable (Debtor) will get converted into Cash the moment he pays money. (4/n)

Suppose a businessman starts a business with his own money (equity/owner’s fund) and uses this money to buy various assets. (5/n)

He earns good amount of profit from his business operations which is reinvested in the business (Profit/ Reserves and Surplus).
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)

So, we now have a simple equation:
Equity + Reserves + Other liabilities = Assets
(7/n)

Also, 'Reserves' is nothing but profit and profit figure is taken from 'Profit and Loss Account'.
Profit is calculated as ‘Income – Expenses’.
So, we now have,
Equity + Income – Expenses + Other liabilities = Assets
(8/n)

Or, we can rearrange this as,
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)

LHS shows us all the credits and RHS represents the debits. (10/n)

Hence, we
👉Debit all expenses, credit all income.
👉Debit all assets, credit all liabilities.
👉Debit the receiver, credit the giver. (11/n)

Accounts is super interesting when you know the rationale behind everything. (12/n)
Tagging @FincademyIn, @FI_InvestIndia, @abhiandniyu, @VidyaG88 for better reach 🙏

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1. Let us understand everything bit by bit.
Say, Raju is a businessman. Now, like every businessman, Raju is ambitious and curious to know his profit. Hence, he keeps his accounts to calculate his profit.

2. Throughout the year, his total revenue was Rs.10 lakh and his total expenditure was Rs.8 lakh. Hence, Raju is having profit or surplus of Rs.2 lakh.

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(1/n)

Let us first understand few basics before we dig into the details. (2/n)

👉The Businesses:
They are the producers of the goods and services. Any business would be happy if it is growing and the prices of the goods and services sold are ever rising. They would be more interested in ‘Economic growth’. (3/n)

👉The Households:
These are the people who are consumers and they spend money to buy goods/ services which are sold by the businesses. Any consumer would be happy if the prices of goods/ services are low. Hence, they would be interested in ‘Less Inflation’. (4/n)

As the prices of goods and services rise, there will be economic growth in nominal sense but then there will also be inflation which is perceived as a problem in developing countries like India. (5/n)

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