What are the 3 golden rules of Debit credit?

The 3 Golden Rules of Debit and Credit

In accounting, the double-entry system is used to record financial transactions. Each transaction is recorded in at least two accounts, with one account being debited and the other being credited. The three golden rules of debit and credit are used to ensure that the accounting equation (Assets = Liabilities + Equity) is always in balance.

Rule 1: Debit the receiver and credit the giver.

This rule applies to all transactions that involve the transfer of assets or ownership. When an asset is received, it is debited because it increases the company’s assets. When an asset is given away, it is credited because it decreases the company’s assets.

Example:

• When a company purchases inventory, the inventory account is debited and the cash account is credited.
• When a company pays off a loan, the loan account is credited and the cash account is debited.

Rule 2: Debit expenses and credit income.

This rule applies to all transactions that involve expenses or income. When an expense is incurred, it is debited because it decreases the company’s equity. When income is earned, it is credited because it increases the company’s equity.

Example:

• When a company pays rent, the rent expense account is debited and the cash account is credited.
• When a company sells a product, the sales revenue account is credited and the inventory account is debited.

Rule 3: Debit losses and credit gains.

This rule applies to all transactions that involve losses or gains. When a loss is incurred, it is debited because it decreases the company’s equity. When a gain is earned, it is credited because it increases the company’s equity.

Example:

• When a company sells a piece of equipment for less than its book value, the loss on sale of equipment account is debited and the cash account is credited.
• When a company sells a piece of equipment for more than its book value, the gain on sale of equipment account is credited and the cash account is debited.

By following these three golden rules, accountants can ensure that the accounting equation is always in balance. This is essential for maintaining accurate financial records and for providing a true and fair view of a company’s financial position and activities.