While learning accountancy a student is taught to
šŸ‘‰Debit all expenses, credit all income.
šŸ‘‰Debit all assets, credit all liabilities.
šŸ‘‰Debit the receiver, credit the giver.
Why is it so?
Let us find out the rationale behind three golden rules of accounts. šŸ‘‡šŸ§µ (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 ā€˜Sources of funds’ (ā€˜Liabilities’) and ā€˜Application of funds’ (ā€˜Assets’) as on a ā€˜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 ā€˜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
šŸ‘‰Debit all expenses, credit all income.
šŸ‘‰Debit all assets, credit all liabilities.
šŸ‘‰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 šŸ™

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