The Golden Rule of life states that you should treat people like you want to be treated in return. But did you know about the golden rules of accounting? In actuality, there are three golden accounting rules. Following these rules would be extremely beneficial in managing your finance.
Keep your accounts accurate and up to date by adhering to the three golden rules of accounting with examples.
Golden Rules of Accounting: What it is?
It goes beyond simple bookkeeping to be a financial accountant. In accounting, a debit entry and a credit entry accompany each transaction. Dual-entry accounting operates in this way. Financial accounting is governed by the three tenets that make up the golden rules of accounts. These guiding principles make sure that financial transactions are meticulously recorded. The golden rules simplify the complex bookkeeping laws into understandable ideas that may be applied and understood.
Variety of Accounts
According to the golden rules of accounting, financial transactions are recorded in ledgers. Depending on the type of account, certain guiding principles apply. Each transaction shall include a debit and credit entry and be the topic of one of the three categories of accounts.
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Real Account
According to real accounting rules, all transactions about assets and liabilities are recorded in a general ledger account. The real account rule includes both tangible and intangible assets. Examples of tangible assets include property, real estate, construction, equipment, etc.
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Personal Account
A personal account rule applies to any general ledger account that relates to a person. It could be made up of fake people or real people, such as businesses, firms, associations, etc.
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Nominal Account
A general ledger account for all firm revenue, costs, profits, and losses is a nominal account. It keeps track of each transaction for a specific fiscal year.
3 Golden Rules of Accounting
The cornerstone of bookkeeping is the golden rules of accounts. The golden accounting rules require you to specify the kind of account for each transaction. Every transaction must adhere to the rules for each type of account. These are the top 3 golden rules of accounting:
1ST Rule: Credit What Leaves, Debit What Enters
For existing accounts, this regulation is applicable. Real accounts include furniture, land, buildings, machines, etc. They have a debit balance by default. Debiting what is coming in, as a result, increases the balance of the current account. According to this, the account balance is reduced by crediting any tangible assets that leave the organization.
2nd Rule: Debit the Receiver, Credit the Giver
This rule covers personal accounts. When a person, whether real or made up, provides something to the organization, it counts as an inflow, and the donor needs to be acknowledged in the records. The receiver must, however, be credited.
3rd Rule: Credit All Income and Gains; Debit All Costs and Losses
Nominal accounts are covered under this rule. Capital is a company’s liability. It consequently has a credit balance. If all income and profits are credited, the capital will increase. However, losses and expenses are deducted.
Conclusion
The foundation for creating financial accounts is laid out by the golden rules of accounting. The business must record every transaction. A ledger entry and a journal entry are both made for each transaction.
Also Read: What You Should Know about Corporate Tax in the UAE?
