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The three golden rules of accounting, by our small business accountants in Melbourne

The golden rules of accounting convert difficult bookkeeping tasks into a set of rules that can be used by anyone studying or working in accounting. Our small business accountants in Melbourne use the following rules when determining which account to debit or credit, as each account type has a rule to be applied to account for the transaction.

1. Debit the receiver, credit the giver

In the case of a personal account, it is crucial that you debit the receiver and credit the giver. When someone gives something to an organisation, such as cash, it becomes an inflow for the organisation and therefore the person giving must be put down as a credit in the book of accounts. The reverse to this is that the receiver or organisation needs to debit.

2. Debit what comes in, credit what goes out

This principle is used for real accounts. Real accounts include assets such as buildings, land, inventory and machinery. By default, this account has a debit balance, so when you debit what is coming in, you are adding to the existing account balance.

3. Debit all expenses and losses, credit all incomes and gains

Our business accountants in Melbourne use this rule when the account in question is a nominal account. As the capital of a company is a liability, it has a default credit balance. When you credit all incomes and gains, you increase the capital and by debiting expenses, you decrease the capital.

For more information on the three golden rules of accounting, please contact our small business accountants in Melbourne today.