To record the business transactions, first of all we have to create the account heads as per the nature of the transactions. There is a golden rule in recording the business transactions that is:- one account is to be debited and other account is to be credited. According to the classification of accounts, we follow the following golden rules for recording the transactions:-
a) Rule For Personal Accounts:- Debit the receiver and Credit the giver.
Example:- Cash paid to Mr. X. In this case, Mr. X will be debited because he is the receiver. Suppose, we purchased the goods from Mr. X . In this case, Mr. X will be credited since he is the giver of the goods.
b) Rule For Real Accounts:- Debit what comes in and credit what goes out.
Example:- In above example we paid cash to Mr. X. In this case the cash will be credited because cash goes out. In case of goods purchased from Mr. X, the Purchase or goods account will be debited since the goods comes in. Goods and cash are real accounts.
c) Rule For Nominal Accounts:- Debit all the expenses and credit all the income.
Example:- Rent paid in cash. Rent is the expenditure that is why rent account will be debited. In another case, interest received from bank, in this case interest will be credited since the interest is income.
Thus, it is a simple theory of double entry system that one account is to be debited and other account is to be credited but totals of debit and credit of all entries must be equal.
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