Golden rules - simple question??

CA Prakash Rai (CA) (129 Points)
Replied 04 October 2011

both sales and liability are credited as per the golden rules because both signify inflow of funds... See the word credit in general paralance means to owe.. so whenever funds come into our business we credit the source to which we owe it.. similarly debit means someone else owes to us.. so wenever we release funds from business we debit the party/asset/ the reason due to which the outflow took place.. Accounts is a language, read it as simply as you read english .

Rangarajan Krishnan (SAP Certified Consultant) (123 Points)
Replied 04 October 2011

Thanks Mr. Prakash Raj for your reply

Let’s make it simpler, shall we

When raising a sales invoice, we pass the following entry

Debtors a/c Dr Debit Debtor because Debit the receiver

To Sales a/c Cr Credit Sales because Credit all incomes or gains

When raising an invoice for purchase of asset, we pass the following entry

Asset a/c Dr Debit what comes in

To Creditor a/c Cr Credit the giver

Now if you see, Sales is credited in the first entry because, “Credit all Incomes or Gains” and Party a/c (Liability) is credited in the second entry because, “Credit the giver”. Forget the debit entries for now – for making it simpler

In your reply you mentioned, both sales and liability leads to inflow of funds and hence both are credited. In the first entry, sales is credited and leads to inflow of funds but in the second entry, liability is created for us to pay in future, which is only outflow and not inflow right?

There is only inflow of asset which is only debited (see the entry)!!!

In your reply you mentioned that whenever outflow takes place, asset or party a/c is debited. I agree with you but why Sales account is credited which leads to inflow of funds??

To make it simpler, how can inflow and outflow of funds are credited in the above example??

CA Prakash Rai (CA) (129 Points)
Replied 04 October 2011

Sir, its Prakash "Rai" not "Raj"

now as for your example, your first example is

Debtors a/c Dr Debit Debtor because Debit the receiver

To Sales a/c Cr Credit Sales because Credit all incomes or gains
now here sales account is credited for the reason that "its beacuse of sales that we are getting an inflow of funds [whether currently(as in cash sales), or in future(as in credit sales)]" i.e., Sales is the source of funds.

in your next example, you are buying an asset. Now from where are you getting the funds to buy that asset?? when you credit creditors (which is not a right term to use, since creditors is the term related to credit purchases) you are telling the source of that fund which you used to buy that asset was a creditor.

Poornima Y (CA) (94 Points)
Replied 04 October 2011

We are writing the accounts on behalf of the business. So if there is a sale, we are getting money which is to be given to the owner (proprietor, shareholder, partner or whatever). But when we receive the asset, we do not give the asset to the owner.

CA Prakash Rai (CA) (129 Points)
Replied 04 October 2011

Originally posted by : Poornima Y
	We are writing the accounts on behalf of the business. So if there is a sale, we are getting money which is to be given to the owner (proprietor, shareholder, partner or whatever). But when we receive the asset, we do not give the asset to the owner.

@ poornima - ma'm that's a wrong point of view. when there is a sale, the proceeds from it don't go to owner of business, it goes into business. Owner has a right on profits which he may withdraw or re-invest as per his/her wish.
see that's why when we pass the entry of withdrawl we debit Drawings A/c (which is to say, nothing but Capital account) and credit Cash or Bank as the case may be. even in this example same logic applies. we Debit the receiver or "the cause of outflow" and credit what goes out.

Rangarajan Krishnan (SAP Certified Consultant) (123 Points)
Replied 04 October 2011

Thanks for your wonderful comment Mr. Prakash Rai (sorry for earlier name mistake)

Dont call sir and all... I am just a student you know....

I accept creditors are the term used for mentioning credit purchases. So in your terms, let’s put it this way, the entry will be then

Asset a/c Dr

To Party a/c Cr (Liability)

Now you are telling me that the party a/c (second example) and sales a/c (first example) are being credited since, it represents the source of funds for purchase of the mentioned asset and for the sale of stock

Now, what I find interesting is that

1. In the first example, Party a/c is debited by the Golden Rule – Debit the receiver and Sales a/c is credited by the Golden Rule – Credit all incomes or gains. In the second example, Asset a/c is debited by the Golden Rule – Debit what comes in and Party a/c is credited by the Golden Rule – Credit the giver.

Now in the second entry, you are telling that party is the source of the fund and hence, it is credited right?? And in the first entry Sales is the source of funds and it is credited right?? SO YOUR ARE TELLING ME THAT THE RULE YOU MENTIONED APPLIES TO BOTH NOMINAL ACCOUNTS AND PERSONAL ACCOUNTS??

2. Now let’s take another example for expenses

Expenses a/c Dr

To Party a/c Cr

Here also the same thing applies party a/c is credited since, it is the source

You used the following exact terms – “when you credit creditors, you are telling the source of that fund which you used to buy that asset was a creditor”

If so, then the same applies to debtors right “when you credit debtors, you are telling the source of that fund which you used to make the sale was a debtor” but that does not happen, Debtor is only debited while making a sale!!!

You treat sales as source of funds and not the debtor which is opposite to the asset purchase example. Why???

3. You mentioned a basis on which Golden Rule for Personal Accounts are formed upon (whether I agreed or not is irrelevant). Can you please mention the basis for other nature of accounts?

Regards

Rangarajan Krishnan

Rangarajan Krishnan (SAP Certified Consultant) (123 Points)
Replied 04 October 2011

Originally posted by : Poornima Y
	We are writing the accounts on behalf of the business. So if there is a sale, we are getting money which is to be given to the owner (proprietor, shareholder, partner or whatever). But when we receive the asset, we do not give the asset to the owner.

Poornima - Can you simplify what point you are coming at??

CA Prakash Rai (CA) (129 Points)
Replied 05 October 2011

1. In the first example, Party a/c is debited by the Golden Rule – Debit the receiver and Sales a/c is credited by the Golden Rule – Credit all incomes or gains. In the second example, Asset a/c is debited by the Golden Rule – Debit what comes in and Party a/c is credited by the Golden Rule – Credit the giver.

Now in the second entry, you are telling that party is the source of the fund and hence, it is credited right?? And in the first entry Sales is the source of funds and it is credited right?? SO YOUR ARE TELLING ME THAT THE RULE YOU MENTIONED APPLIES TO BOTH NOMINAL ACCOUNTS AND PERSONAL ACCOUNTS??

---> First of all, i am not laying down any rules, i am just telling you the way these Golden Rules were designed. These Golden Rules are like Grammer of a language.
To put it simply i am neither talking about real accounts nor Personal account or Nominal Account. Its a general interpratation of day-to-day accounting entries.

2. Now let’s take another example for expenses

Expenses a/c Dr

To Party a/c Cr

Here also the same thing applies party a/c is credited since, it is the source

You used the following exact terms – “when you credit creditors, you are telling the source of that fund which you used to buy that asset was a creditor”

If so, then the same applies to debtors right “when you credit debtors, you are telling the source of that fund which you used to make the sale was a debtor” but that does not happen, Debtor is only debited while making a sale!!!

You treat sales as source of funds and not the debtor which is opposite to the asset purchase example. Why???

--->: WE DO NOT CREDIT DEBTORS... Debtors are debited at the time of credit sales. now in such entry "Debtor" is an "asset", i.e., a future inflow of funds.. and again such future inflow is caused by the credit sales we made thats why sales are credited.. now looking at it from the point of view of "why the debtors are debited??" the answer would be that "debtors are debited beacuse now they owe us something (refer to first answer for interpretation of debit and credit), our debiting of debtors (say Mr. X) shows that Mr.X now owes us some money and we have a right to collect from him"

See the journal entry we pass is like a sentence broken into two meaningful halves. The first half (whether it is Dr. part or Cr. part) tells us "WHAT HAPPENED" and the second half tells us "THE REASON" for its happening.
you can try this logic in any journal entry and you will find this to be true.
Those people who drafted these golden rules very carefully classified the accounts in three categories so that they can frame a minimum specific set of rules (like Grammer in English) to facilitate writing these statements in standardised form.

Rangarajan Krishnan (SAP Certified Consultant) (123 Points)
Replied 05 October 2011

Thank you Mr. Prakash Rai for your wonderful reply

You have given me more interesting points to think about....

Let me analyse them myself and come back to you...

Regards

Rangarajan Krishnan

CA Prakash Rai (CA) (129 Points)
Replied 05 October 2011

You are most welcome

Golden rules - simple question??

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