Golden Rules of Accounting

Golden Rules of Accounting

1) Rule One – “Debit what comes in – credit what goes out.”

2) Rule Two – “Credit the giver and Debit the Receiver.”

3) Rule Three – “Credit all income and debit all expenses.”

These are three Accounting’s golden rules aid in the documentation of financial transactions in ledgers. These golden guidelines differ depending on the type of account.

Each transaction would have a debit and a credit entry and will be assigned to one of the three types of accounts shown below.

Nominal Account

A nominal account is a normal ledger account that records all income, expenses, profits, and losses for a business. It records all transactions for a single fiscal year. The balances are reset to zero and the process can begin again. A nominal account is one that pays interest.

Real Account

A real account is a normal ledger account that can record all the assets and liabilities. It has both – actual and intangible assets. Tangible assets include furniture, land, buildings, machinery, and so on. Intangible assets, on the other hand, such as goodwill, copyright, patents, and so on.

As real accounts are carried forward to the next fiscal year, they are not closed at the end. In addition, a real account shows on the balance sheet. A form of real account is a furniture account.

Personal Account

A personal account is a general ledger account that pertains to individuals. It can be natural persons – such as humans, or artificial persons, like corporations, firms, associations, and so on. Company A comes as the receiver when it gets funds or credit from another firm or individual. In the event of a personal account, the other business or individual who contributes to it becomes the giver. A personal account is a creditor account.

Golden Rules of Accounting

Following are the golden rules of accounting-

1) Rule One

“Debit what comes in – credit what goes out.”

This legislation applies to existing accounts. Accurate replicas include furniture, land, buildings, machines, and so on. By default, they have a negative balance. They are debiting what is arriving in order to enhance the balance of the current account.

2) Rule Two

“Credit the giver and Debit the Receiver.”

It is a rule for personal accounts. When someone, genuine or fictitious, contributes to the business, it counts as an inflow, and the giver must be noted in the records. However, the receiver must be acknowledged. Consider purchasing a gift from a gift shop. Your account will be updated to reflect the transaction.

3) Rule Three

“Credit all income and debit all expenses.”

This regulation applies to nominal accounts. A company’s capital is its obligation. It has a credit balance. If all earnings and profits are credited, the capital will increase. When losses and costs are deducted, the capital declines. 

Benefits of Accounting Procedures

Maintaining financial transaction accounts in accordance with accounting’s golden standards provides some benefits.

·  Maintaining business records is crucial to a company’s success. Accounting makes sure that all of the business transactions are documented in a secure location in the correct order and, more significantly, in a methodical manner.

·  A solid accounting procedure aids in correct business valuation, allowing for more investment and expansion.

·  A healthy budget based on proper accounting processes may provide a solid foundation for any organization to grow. With a solid accounting process in place, future estimates are more accurate.

·  If the golden rules of accounting are followed, financial transactions will be recorded correctly. If the accounting is done correctly – financial statements like profit and loss statements, trading accounts, and balance sheets could all be created rapidly.

·  Accounting done according to the golden principles makes it easy to compare one year’s financial outcomes to another. Analysis of year-on-year financial performance becomes simpler and more reliable.

·  Accounting is critical for organizations in order to comply with regulatory bodies. It would be hard to accomplish regulatory compliance without the basic basis laid down by the accounting rules.

·  Tax shortfalls caused by faulty accounting methods may result in substantial penalties from government agencies, negatively harming image and brand value.

·  The accounting procedure based on the accounting rules ensures that financial data are trustworthy and valuable in the decision-making procedure of senior management.

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