Golden rules of accounting

Golden Rules of Accounting: Complete Guide

You must hear of “The Golden Rules Of Life.” And It means Treat others Well if you want to be treated. But there are also golden accounting rules; accounting is not just bookkeeping. There is a dual entry in accounting- debit and Credit. Recognizing which account has to be credited and which is debited is essential. And financial accounting revolves around three rules, known as the golden rules of accounting.

With these golden rules, the systematic recording of financial transactions is done. Complex bookkeeping services can be simplified with the golden rules in the set the principles that are easily studied, understood and applied. This article will discuss a complete guide on the golden accounting rules.

Types of Accounting

There are three types of accounting; every transacting of debit and Credit belongs to one of the three types of accounting.

Nominal Accounting

The business transaction contains a general ledger, namely expenses, income, losses, and profits, known as nominal accounting. It includes all transaction records in one fiscal year, reset to zero, and gives a new start when the next fiscal year begins. To know more, you can connect with accounting services in UAE.

Examples of nominal accounts are interest accounts, salary accounts, rent accounts, and commission accounts.

Personal Account

According to law, The account represents bodies represent bodies that are not human beings but act as separate legal entities, known as artificial personal accounting.

Natural personal Accounting

Accounting that symbolizes human beings, for example, creditors, debtors, etc.

Representative Personal Accounting

It is a type of accounting representing the accounting of natural and artificial entities. And its account transacting belongs to the previous and the coming year.

Real Accounting

This accounting is also a general ledger, but its transaction relates to the assets and liabilities of the company. And these assets are divided into two assets that are tangible and intangible assets. Tangible assets relate to land, building, furniture, etc.; intangible assets include patents, copyrights, goodwill, etc.

Golden Rules of Accounting

The golden rules of accounting form the basis of bookkeeping. You must identify the type of account for each transaction by the golden accounting standards. There are specific guidelines for each type of account that must be followed for every transaction. The three guiding principles of accounting are as follows:

# Rule 1: Debit What Comes In, Credit What Goes Out.

This accounting rule applies to real accounts, which include land, furniture, buildings, etc. They have a debit balance by default. As a result, debiting what is coming in increases the current account’s balance. Crediting what goes out lowers the account balance when a tangible asset leaves the company.

For example, an X company paid 1,000 USD in rent on June 1st. This transaction will show the following:

Date AmountDebit Credit
01/06/2022Rent Amount1,000 USD—–
01/06/2022Cash Account—–1,000 USD

# Rule 2:  Debit the receiver, Credit the Giver

This rule applies to personal accounts; whenever an artificial and real person donates anything to any organization, that become an inflow, and that should be credited in the book. Conversely, it must be debited by the receiver. You can contact the best accounting service in Dubai to get the best accounting knowledge.

For example, if company X donated 10,000 USD in cash to an NGO on July 17th, 2022. This transaction will be recorded as follows.

17/07/2022NGO Account10,000 USD—–
17/07/2022Cash Account—–10,000 USD

# Rules 3: Debit all Expenses and Losses, Credit all Incomes and Gains

This rule applies to nominal accounts, and company capital is its liability. As a result, we can see that it can have a credit balance. Crediting all the gains and income will increase the capital. On another site, the capital reduces when losses are debited.

For example, X company sold its machinery for 20,000 USD on July 2nd, 2022. It will be recorded as:

Date AmountDebitCredit
02/07/2022Machinery account20,000 USD—–
02/07/2022Cash account—–20,000 USD

Summing up

Golden Rules Of AccountingReal accountPersonal AccountNominal account
DebitWhat comes inReceiverAll losses
CreditWhat goes outGiverAll gains

To wind up

The golden rules of accounting lay the foundation for creating financial statement accounts. The business must record every transaction, and a ledger entry and a journal entry are both made for each transaction. Determine which account each transaction belongs to, and then make journal entries by the three guiding principles. The golden rules of accounting must therefore be understood to do bookkeeping.