Accounting has three basic principles which need to be followed for the debit and credit entries. There are three types of accounts which include personal account, real account and a nominal account. For each of the above mentioned accounts, there are debit and credit rules which make it simpler to record the transaction. The real account is an account for assets which are fixed in nature, the personal account is for an individual in the business through whom the transactions are carried out and the nominal account is an account for the income and expenses which are incurred in a business. For personal accounts, the rule is supposed to debit the receiver and credit the giver, for real accounts the rule is debit what comes in and credit what goes out. Real accounts include assets like land and building and machinery that is why it always has a debit balance. When an asset is sold, the account needs to be credit. Lastly, for nominal accounts which include incomes and expenses, debit the expenses and losses and credit all the incomes and gains. By crediting the income, you increase the capital and by debiting the losses, you reduce the capital balance. It is extremely important to follow the basic rules of accounting for any business. It makes it easy for accounting as well as enables the reader to derive thorough information from the accounting entries.
The owner’s drawing account has a debit balance.
Revenue accounts have a credit balance.
Expense accounts have a debit balance.
Liabilities and owners’ equity have a credit balance.
Owner’s equity= Income statements accounts-Drawings
References
Golden Rules of Accounting. (n.d.). Retrieved May 21, 2016, from Management Study Guide: http://www.managementstudyguide.com/golden-rules-of-accounting.htm
