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3 Golden Rules of Accounting and How to Use them
The Indian government compels all entities to keep financial records and present them to all stakeholders. The most significant part of recording financials, often known as financial accounting, is bookkeeping. It contains two entries: debit and credit. The golden rules of accounting are guidelines that ensure that bookkeeping is done in a systematic manner. In this article you will learn about the 3 Golden Rules of Accounting and How to Use them.
What Account types are in Commerce?Account Types in Commerce
The golden rules of accounting assist in documenting financial transactions in ledgers. These golden guidelines depend on the type of account. Each transaction will include a debit and credit entry and will be assigned to one of the three account types shown below.
- Real Account
- Personal Account
- Nominal Account
Financial accounting involves more than just bookkeeping. In accounting, each transaction has two entries: debit and credit. It is critical to determine which accounts should be credited and which should be debited. This is a dual entry accounting system. Financial accounting is based on three rules known as the golden laws of accounting. These guidelines ensure that financial transactions are recorded in a systematic way. It reduces complex bookkeeping rules to a collection of simple concepts that can be understood and used.
3 Golden Rules of Accounting First Rule“Debit what comes in – credit what goes out.”
This legislation affects existing accounts. Accurate replicas contain furniture, machines, land, buildings, and so on. They start out with a negative balance. They debit what comes in to increase the current account balance.
3 Golden Rules of Accounting
Second Rule
“Credit the giver and Debit the Receiver.”
This is a guideline for personal accounts. When someone, whether genuine or fraudulent, gives to the firm, it is considered an inflow, and the giver must be recorded. However, the receiver needs to be acknowledged. Consider buying a gift at a gift shop. Your account will be updated to reflect this transaction.
3 Golden Rules of Accounting
Third Rule
“Credit all income and debit all expenses.”
This regulation pertains to nominal accounts. A company’s capital represents its responsibility. It has a credit balance. If all earnings and profits are credited, the capital will grow. When losses and expenses are deducted, capital decreases.
3 Golden Rules of Accounting
How to apply the 3 Golden Rules of Accounting?
The golden laws of accounting must be used based on the type of account, such as real, personal, or nominal. For example-
1) In the event of a personal account, the receiver is debited and the giver is credited.
2) If it is a real account, anything that enters should be logged on the debit side, and anything that leaves should be registered on the credit side.
3 Golden Rules of Accounting
Using the Golden Rules of Accounting
Applying the golden accounting rules will assist you in determining the journal entries:
Using First RuleA company A starts its firm with a capital of INR 1,000,000.
Cash is classified as a tangible asset and hence belongs to a real account. Capital is a personal account. According to the golden rule of real and personal accounts:
Debit whatever comes in.
Credit the giver.
Using the Second RulePays cash for goods bought from Company B.
Company B is a personal account, while cash is part of a real account. According to the golden rule of personal and real accounts:
Debit the receiver.
Credit what goes out.
Using the Third RuleBuys items worth INR 50,000 on credit from Company C.
Purchase transactions are considered an expense and thus are recorded in a nominal account.
Company Y is part of the personal account. According to the golden rule of nominal and personal accounts:
Debit all expenses and losses.
Credit the giver.
Conclusion
The golden rules of accounting serve as the foundation for the preparation of financial statements. Every transaction must be recorded. Each transaction is first recorded as a journal entry, and subsequently as a ledger. The golden rules of accounting serve as the foundation for the preparation of financial statements. Every transaction must be recorded. Each transaction is first recorded as a journal entry, and subsequently as a ledger.
Frequently Asked Questions What are the benefits of accounting rules?In addition to providing a conceptual framework for the double-entry method, the three golden laws of accounting provide the following advantages:
- Universal structure for documenting financial transactions and interpreting financial data.
- Consistency and logic reduce ambiguity, ensuring that everyone reading the accounting records understands the transaction.
- It allows the financial statements of the same company to be compared across time as well as those of other companies.
- The balance sheet must tally, and the income statement must show an exact net income figure. Accounting standards help to ensure that accurate entries are made, so your financial statements are more likely to be correct.
Accounting regulations apply to all businesses that keep books of accounts. This contrasts with other accounting regulations, which often require less severe reporting from small enterprises than from publicly traded companies.
Depending on the size of your organization, you may need to use cash, modified cash, or accrual basis accounting. However, all organizations must continue to record transactions in accordance with the financial accounting requirements of the double-entry bookkeeping system.