Let us first understand how to interpret a Balance Sheet. (2/n)
While learning accountancy a student is taught to
šDebit all expenses, credit all income.
šDebit all assets, credit all liabilities.
šDebit the receiver, credit the giver.
Why is it so?
Let us find out the rationale behind three golden rules of accounts. šš§µ (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 (Outsiderās money) to expand his business. So, the Balance Sheet will look something like this, (6/n)
Profit is calculated as āIncome ā Expensesā.
So, we now have,
Equity + Income ā 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)
šDebit all expenses, credit all income.
šDebit all assets, credit all liabilities.
šDebit the receiver, credit the giver. (11/n)
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