Golden Rules of Accounting | 3 Golden Rules of Accounting
Golden rules of accounting - a crucial aspect that helps in ascertaining the financial information of an economic entity.
Accounting plays an essential role in pertaining business transactions, as it provides contemporary financial information to stakeholders. Considering that accounting helps in determining the financial position of a company or firm, the information provided in financial accounts must be accurate and should reflect the true picture of all the related financial aspects.
In addition, to form or reflect a clear picture of financial transactions and the position of a company, all the transactions must be included while creating accounts of a company or firm.
And all of it depends on the golden rules of accounting.
In this blog, we will emphasize 3 golden rules of accounting that intend to bring uniformity because these golden rules help in creating a first basis of the accounting journal entries, be it bookkeeping or accounting.
However, before diving into the three golden rules of accounting, let’s understand distinct types of accounts.
What Are the Distinct Types of Accounts?
Understanding different types of accounts are essential before understanding the golden rules of accounting, considering that it will help us to have a more clear understanding of the three golden rules.
So, there are three types of accounts, namely -
- Real account
- Nominal account
- Personal account
In the next sections, we will learn about these in detail, let’s commence with what is a real account.
1. Real Account
A real account is basically a permanent account, which is a type of leader account that does not close at the end of the accounting period or a certain duration. Thus, rather than being closed a real account continues to work, accumulate balances, and carry on to the next financial year or certain duration.
However, with the commencement of a new financial year or certain duration, a particular amount in the real account changes to beginning balances.
Golden Rule of Real Account - Debit what comes, credit what goes.
2. Nominal account
A nominal account is related and is associated with incurred losses, expenses, income, and gains. Basically, a nominal account includes information about the purchase account, sales account, salary account, commission account, and other accounts whose outcome is either profit or loss, that will finally transfer to the capital account.
Golden Rule of Real Account - Debit all the expenses and losses, credit all income and gains.
3. Personal account
A personal account is basically a general ledger account of individuals, firms, and associations. What is a personal account can be easily understood through an example, a personal account could be Raj’s account, Rajesh’s account, Ramesh’s account, Suresh’s account, etc.
The mentioned individuals could be natural persons and artificial individuals.
In a nutshell, a person, partnership firm, company, corporate bodies, and others can open a personal account.
Golden Rule of Real Account - Debit the receiver, credit is the giver.
As it is clear the “three golden rules of accounting,” differ depending on the nature of accounting. In short, for each account, distinct golden rules of accounting are applicable that define how transactions must be treated.
Since what are the different types of accounts are clear, including a gist of what are the golden rules of accounting is clear, let’s have an in detail look at the golden rules of accounting with examples.
What Are the Golden Rules of Accounting | Golden Rules of Accounting With Examples
As mentioned above, the three golden rules of accounting differ depending on the type of account, thus for a better understanding we will have a look at “golden rules of accounting with examples.”
1. Real Account - Golden Rule of Accounting
“Debit what comes, credit what goes.”
It can be understood through the below-mentioned example.
Say a person made a payment of a loan, in this situation, cash will go out and the loan will be settled. Thus, the entry will be, the loan account will be debited against the bank account (credited).
2. Nominal Account - Golden Rules of Accounting
“Debit all the expenses and losses, credit all income and gains.”
This one of the three golden rules of accounting can be understood through the below-mentioned example.
Suppose a product is purchased worth Rs. 15,000 cash, now the entry will be made in two accounts, purchases account, and cash account. The amount will be debited in the purchase account, while credited in the cash account.
Moreover, in this equation, we can also see a relation between nominal and real account, as the amount debited in the purchase account reflects the rule applicable to nominal account as debit all expenses. Conversely, if you talk about, the amount credited in a cash account as per the rule of a real account, that is credit that goes out.
3. Personal account
“Debit the receiver, credit is the giver.”
Last, yet one of the most important golden rules of accounting is debit the receiver, credit is the giver,” which can be understood through the below-mentioned example.
For instance, you have made a purchase of Rs. 10,000 from XYZ firm, likewise in the previous example of a nominal account, the amount will be debited in the purchase account, while credited in the company's account. This will be done, considering that XYZ company is the giver or providing the goods, however, you are receiving them.
Hope you have understood, “what are the golden rules of accounting,” plus assuming that our attempt to make you understand the golden rules of accounting with examples is worth it.
However, understanding these golden rules of accounting is easy, if your concept of types of accounts is clear.
Hope this blog has helped you in understanding the golden rules of accounting. Moreover, we are a compliance service provider providing 200+ compliance services in India and Globally for over 9+ years.
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