THE GOLDEN RULES OF ACCOUNTING
Today we are going to discuss the golden rules of accounting but before understanding these rules we should know why these rules are important.
- As we all know a lot transactions take place in a business every day. These transactions need to be recorded following the double entry book keeping system though the whole system of debit and credit is thought the base of double entry book keeping which is difficult to follow.
- No company wants to waste resources on a specialized employee for record keeping. Generally, this done by the clerical staff.
- These rules are not only useful now but are very useful and followed even at a higher level of accountancy.
The 3 golden rules: –
- Debit the receiver, credit the giver.
- Debit what comes in, credit what goes out.
- Debit all expenses and losses, credit all incomes and gains.
You must be wondering how these rules are applied and where exactly. So, let’s discuss the types of accounts.
Types of accounts: –
- Real account deals with all types of assets in the business. Whatever assets comes inside the business gets debited and whatever assets goes outside the business gets credited.
- In personal account as the name suggests this account deals with the person’s account as well as an artificial person’s account. Artificial accounts are the banks and institutes which have an individual existence in the eyes of law.
- Nominal account deals with all the expenses, losses, income and gains of the business.
Let’s discuss a few examples to help you understand better: –
Rule 1 EXAMPLE
* Say you purchase $1000 worth of goods from company ABC.
* In your books, you need to debit your purchase account and credit company ABC.
* Because the giver, company ABC, is providing goods, you need to credit company ABC.
* Then, you need to debit the receiver, your purchase account.
Rule 2 EXAMPLE
* Let’s say you purchased furniture for $2,500 in cash.
* Debit your furniture account (what comes in)
* Credit your cash account (what goes in)
Rule 3 EXAMPLE (Expenses and Losses)
* Let’s say you purchased $3,000 goods from company XYZ.
* To record the transaction, you must debit the expenses ($3,000 purchase) and credit the income.
Rule 3 EXAMPLE (Income and Gain)
* Say you sell $1,700 worth of goods to company XYZ.
* You must credit the income in your sales account and debit the expenses.
I HOPE THIS HELPED YOU ALL!!!