Golden rules of accounting.

Profit is credited to Partners Account?Then why is it that when half of asset is taken by partner at book value,his account gets debited?Please explain "Debit the Receiver" rule.When partner takes money,how does his account get debited?

asked Jul 24, 2015 in Journal Entries by VivekN (10 points) 1,368 views

1 Answer

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     Dear Vivek, many many students find difficulties in application of the Golden Rules of Accounting.  I suggest that while forming journal entries, you use modern rules of debit and credit based on Accounting Equation, they are easy to understand and apply.  I am trying to explaining the confusion you have about the rule 'Debit the Receiver Credit the Giver'.

Before I explain the rule, I would like to mention two important points: 

(1) Separate Accounting Entity Concept: According to this concept the business and owner of the business are two different entities from accounting point of view.  So while forming journal entries you have to remember that Business and Owner are two different entities.

(2) Secondly remember that "Debit the receiver Credit the Giver' rule applies to Personal Accounts only.

     The journal entry for rent due is: 

Rent A/c   Dr.

  To Rent Outstanding A/c (which represents basically Landlord's A/c)

What is the logic behind crediting Landlord's A/c?  Logic is that he has GIVEN to the Business (enterprise) his premises for use, that is why his account is being credited.  Similar logic can be given for Salary Outstanding A/c.  Salary Outstanding A/c represents collectively all those employees whose salary has become due but not paid.  Logic for credit Salary Outstanding A/c is that employees have GIVEN their services to the business (Enterprise).

In case of OWNER of the Business, he has given  CAPITAL to the  Businans, hence the Profit earned by the Business is due to the Owner, that is why his account is being credited:

Profit & Loss A/c   Dr.

  To Capital A/c

     When partner/proprietor takes away any asset or money from the BUSINESS, his Capital A/c is debited because in this case, BUSINESS is giving to the OWNER/PARTNER.  This is the reason in this case the entry is:

Capital A/c   Dr.

  To Asset A/c (whichever asset is taken by the owner/partner)

     I hope the Rule Debit the Receiver and Credit the Giver is clear to you.  In case there is still some doubt, please don't hesitate to discuss it further.

answered Jul 25, 2015 by jbsclasses (3,971 points)