While learning accountancy a student is taught to
👉Debit all expenses, credit all income.
👉Debit all assets, credit all liabilities.
👉Debit the receiver, credit the giver.
Why is it so?
Let us find out the rationale behind three golden rules of accounts. 👇🧵 (1/n)
'Balance Sheet' and 'Profit & Loss Account' are two important aspects to learn accountancy.
Let us first understand how to interpret a Balance Sheet. (2/n)
Balance sheet is a simple snapshot of ‘Sources of funds’ (‘Liabilities’) and ‘Application of funds’ (‘Assets’) as on a ‘particular’ day. (3/n)
It is important to note that the Balance sheet may change every day. That’s because the liabilities side and the assets side may change frequently.
Example: The customer from whom the amount was receivable (Debtor) will get converted into Cash the moment he pays money. (4/n)
Suppose a businessman starts a business with his own money (equity/owner’s fund) and uses this money to buy various assets. (5/n)
He earns good amount of profit from his business operations which is reinvested in the business (Profit/ Reserves and Surplus).
Also, the businessman decides to take loan (Outsider’s money) to expand his business. So, the Balance Sheet will look something like this, (6/n)
So, we now have a simple equation:
Equity + Reserves + Other liabilities = Assets
Also, 'Reserves' is nothing but profit and profit figure is taken from 'Profit and Loss Account'.
Profit is calculated as ‘Income – Expenses’.
So, we now have,
Equity + Income – Expenses + Other liabilities = Assets
Or, we can rearrange this as,
Equity + Income + Other liabilities = Assets + Expenses
This is a beautiful equation.
LHS shows us all the sources of money and RHS shows us its application. (9/n)
LHS shows us all the credits and RHS represents the debits. (10/n)
Hence, we
👉Debit all expenses, credit all income.
👉Debit all assets, credit all liabilities.
👉Debit the receiver, credit the giver. (11/n)
Accounts is super interesting when you know the rationale behind everything. (12/n)
Tagging @FincademyIn, @FI_InvestIndia, @abhiandniyu, @VidyaG88 for better reach 🙏

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More from @caswapnilkabra

29 Mar
Here's a collection of my posts on Medium I wrote since 2020!
RT if you find any value in them. 🧵👇
2. Why I am bullish on Bharti Airtel

Read 9 tweets
25 Mar
As the earnings season will begin soon, I decided to write a simplified yet detailed thread on ‘How to read and understand the quarterly result of a company’.
Read patiently.
Bookmark if required.
RT if found useful. 👇🧵 (1/n)
1⃣Why are quarterly results important?
The shareholders have put their hard earned money in the company.
So, they must know about the affairs of the company. But, they can not have access to the books of accounts. (2/n)
Only and only the management of any company can access the books.
Hence, to give a snapshot of company’s financial performance, listed companies are required to publish ‘Quarterly Results’, which are available in public domain. (3/n)
Read 35 tweets
22 Mar
‘Why don’t central banks like RBI mint more money and pump in the economy to speed up the growth and solve nation’s basic problems?’
As a teacher, I have been asked this many times.
Here’s a simple thread to explain the basic economics behind why this is not so ideal. 🧵👇 (1/n)
RBI is not against the increasing demand and the growth. All RBI wants is 𝑠𝑢𝑠𝑡𝑎𝑖𝑛𝑒𝑑 𝑎𝑛𝑑 𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑙𝑒𝑑 growth.
Let us understand how things work from the very beginning, shall we? (2/n)
𝐑𝐁𝐈 𝐦𝐢𝐧𝐭𝐬 𝐦𝐨𝐫𝐞 𝐦𝐨𝐧𝐞𝐲
So, RBI decides to mint more money and increase the money supply in the economy. (3/n)
Read 25 tweets
19 Mar
I have seen people who are scared of the subject ‘Economics’. There are many others who find it boring!
But, I am sure everyone knows the basics of ‘Economics’. In our practical life, we apply them, unaware of the fact that it is ‘Economics’.
Here’s a thread. Read on. 👇🧵(1/n)
You go to a vegetable market, ask the vendor for the price of vegetable.
He says, he is willing to sell you at Rs.20/kg but you are adamant to buy at Rs.15/kg. You bargain and finally settle at Rs.18/kg. (2/n) Image
Hence, you both settle at Rs.18/kg where both are satisfied.
You have applied here the concept of 𝐞𝐪𝐮𝐢𝐥𝐢𝐛𝐫𝐢𝐮𝐦 𝐩𝐫𝐢𝐜𝐞 which is the intersection of demand and supply curve and it is the level where buyer and seller both are satisfied. (3/n)
Read 16 tweets
17 Mar
One of the many misconceptions people have about investing in stock market is that it is a zero-sum-game. They have this misunderstanding that one’s income is someone else’s loss.
But no, that is not how things work.
Here’s a simple thread to explain this🧵👇
To begin with, let us get this clear as to how a zero sum game theory works. (2/n)
Say, there are 7 people playing a simple game. Their names are Red, Purple, Royal blue, Sky blue, Sea green, Green and Yellow.
They all chip in Rs.100 and keep the money (Rs.700) on the table. (3/n)
Read 16 tweets
15 Mar
Have you ever wondered in case of stock market crash, where does the money go?
We often read and hear that investors lost crores of rupees whenever market falls, but where has the money gone?
Here’s a thread explaining the economics behind it 🧵👇
Read on (1/n)
Firstly, let us understand something fundamental.
‘Price’ of anything is actually more of a perception.
Yes, you read it right, ‘Price’ of a commodity is influenced by how it is perceived by the interested people. (2/n)
Let me explain this with these four cases. Let us observe them bit by bit. (3/n)
Read 19 tweets

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