Whether you’re running a business or just trying to understand your personal finances better, having a grasp of some accounting basics can go a long way. At our audit and accounting firm in Dubai, we follow 3 golden rules of accounting that help keep things straight.
Rule 1: Debit the receiver, credit the giver
This rule helps track where money is coming from and going to. When recording a transaction, the account that receives value is debited, and the account that gives or provides value is credited. For example, when you purchase inventory, you debit your inventory account (the receiver of inventory) and credit your supplier account (the giver of inventory).
Rule 2: Debit what comes in, credit what goes out
This rule focuses on inflows and outflows. For asset and expense accounts, debits increase balances while credits decrease them. So when cash comes in, you debit your cash account to show an increase. When you pay expenses, you credit your expense account to show a decrease in assets/increase in expenses. Understanding this flow is key for our accounting firm Dubai.
Rule 3: Debit expenses and losses, credit revenues and gains
This rule keeps income and expense recording consistent. Accounts like cost of goods sold, rents, utilities, and other expenses are debited when incurred, reducing net income. Revenue accounts like services rendered or sales are credited, increasing net income. Crediting revenues and debiting expenses allows us to correctly calculate net income at our Dubai accounting company.
Putting It All Together
While these rules may seem abstract at first, applying them across the full accounting cycle illustrates how they work together to tell a company’s financial story:
• Opening inventory is debited as an asset received
• Supplier is credited when inventory is purchased on credit
• Inventory is credited and customer is debited when goods are sold on credit
• Cash is debited when accounts receivable makes payment
• Revenue is credited at point of sale
• Salaries are debited as an expense when incurred
Following these three golden rules allows our accounting firm in Dubai to reliably track money flowing in and out of a company. Debiting and crediting correctly is vital for producing financial statements that show the true standing of a business. With practice, these essential guidelines become second nature to apply.
