What are the Golden Rules of Accounting?

Golden Rule of Accounting

Financial accounting is more than just a way of keeping track of money. In accounting, every transaction has two entries - debit and credit. It is important to identify which account needs to be credited and which one is debited.

The three golden rules of accounting ensure the systematic recording of all financial transactions. These rules provide a simple framework for understanding, studying, and applying complex book-keeping principles.

What Are The Different Types of Accounts?

The accounting principles that guide the recording of financial transactions in ledgers are based on the type of account. Each transaction will have a debit and credit entry and will fall into one of the following three categories of accounts.

1. Real Account
2. Personal Account
3. Nominal Account

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What are 3 golden rules of accounting?

The three basic principles of accounting & bookkeeping are:

-Classifying each transaction into the appropriate account

-Determining the direction of the transaction

-Entering the transaction into the ledger

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And following are the golden rules:

Debit What Comes In Credit What Goes Out.

This accounting rule applies to accounts that represent physical objects. This includes furniture, land, buildings, and machinery. By default, these types of accounts have a debit balance. As a result, adding money to the account increases the balance. Similarly, when an asset is removed from the company, subtracting the amount from the account balance decreases it.

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Debit the Receiver Credit the Giver.

This rule applies to personal accounts. When a real or artificial person donates something to the organization, it becomes an asset, and the person must be credited in the books. Conversely, the receiver must be debited.

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Debit All Expenses and Losses Credit all Incomes and Gains.

This rule applies to nominal accounts. A company's capital refers to its liability. If you credit all the income and gains, it will increase the capital.

On the other hand, when expenses and losses are debited, the capital decreases.

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What Are The Basic Principles of Accounting?

Monetary Unit

In order for accounting to work, all values must be recorded using a single monetary unit. This can pose a problem when dealing with goods, since assigning values to them is subjective. However, there are rules that accountants must follow in these situations.

Going Concern

The going concern concept is an accounting principle that suggests a business will continue to operate in the near future. This means the company will not be forced to close or discontinue any operations.

Organizations can function on credit and account for accounts receivables and payables which intend to receive or pay in the future because of the going concern principle. They can also charge depreciation assuming that the machine will be used for many years.

However, if management has information that the operations will be suspended in the near future, normal accounting ceases. A special type of accounting for dissolution purpose is used instead.

Principle Of Conservatism

Accountants are often seen as very cautious people. They want to be optimistic but also be prepared for the worst case scenario. This is evident in the rules and regulations they have created for their profession. One of the key principles of accounting is conservatism. This principle states that when there is uncertainty about how much money will come in or go out, organizations must report the lowest possible income and the highest possible expenses.

This can be observed in the accountant's practice of valuing inventory at the lower of cost or market price. However, this conservative approach helps the company be prepared for any potential financial crises.

Cost Principle

The cost principle is similar to the principle of conservatism. The cost principle suggests that companies should list all items on financial statements at the cost price. However, assets such as land and buildings, gold, etc. may appreciate over time but accountants will not allow this appreciation to be reflected on financial statements until it is realized.

Many accountants believe that the market value of anything is merely an opinion. Since there are so many opinions, accountants cannot base their work on them. The selling price of something, however, is a fact because someone has paid for it, and this can be verified. Therefore, accounting is based on the cost principle and thus on facts.

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