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 of transactions take place in a business every day. These transactions need to be recorded following the double-entry bookkeeping system through the whole system of debit and credit is thought the base of double-entry bookkeeping which is difficult to follow.
No company wants to waste resources on a specialized employee for record keeping. Generally, this is done by the clerical staff.
These rules are very useful and followed even at a higher level of accountancy.
What is Accounting ?
The systematic process of logging, compiling, analysing, and summarising financial information and transactions inside an organisation is referred to as accounting. It entails the collection, analysis, and dissemination of financial data to a range of parties, including management, creditors, investors, and regulatory agencies.
Accounting’s main goal is to deliver precise and trustworthy data about a company’s financial activities so that educated choices can be made, finances can be planned, and performance can be assessed. It entails the organised categorization and recording of financial transactions including sales, purchases, expenses, and investments.
Benefits of Accounting-
Every day, there are hundreds of business transactions involving the purchasing and selling of goods. These are available in cash and on credit. Wages, salaries, commissions, and other forms of compensation are given out. It’s difficult to keep track of everything.
-Even the most capable individual cannot recall everything. Accounting eliminates this shortcoming.
-Accounting offers businesses numerous priceless information.
-In the event of legal disagreements with other traders, accounting records may be used as proof. The accounting is accepted by the court.
-Financial accounting aids in solving issues with employee pay, benefits, and other compensation.
Three Golden Rules of Accounting-
1) Debit the receiver, credit the giver.
2) Debit what comes in, credit what goes out.
3) 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 come inside the business gets debited and whatever assets go 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 the law.
The nominal account deals with all the expenses, losses, income, and gains of the business.
Let’s discuss this with the help of a few examples to help you understand better–
Rules of Accounting – 1 (Example)
1) Debit the receiver, credit the giver.
-Let’s 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 and your purchase account.
Examples of Golden Rules of Accounting-
Rules of Accounting – 1
2) Debit what comes in, credit what goes out.
-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).
Rules of Accounting – 2
(Expenses and Losses)
3) Debit all 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.
Rules of Accounting – 3
(Income and Gain)
3) Credit all incomes and gains.
-Say you sell $1,700 worth of goods to company XYZ.
-You must credit the income in your sales account and debit the expenses.
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Three Golden Rules of Accounting
