Three Golden Rules Of Accounting

Three Golden Rules Of Accounting?

There are three types of Account which are: real, nominal and personal. The golden rules of accounting makes it mandatory we first ascertain the type of account in question.

What Is Meant By Golden Rules Of Accounting?


In Double entry system of accounting, because of its dual aspect, every transaction affects two accounts, one is debited and other is credited. To record the transactions in the journal, in a systematic way, certain rules must be followed. These rules are known as Golden Rules of Accounting.

Each account type has its own rules which are different from one another that needs to be applied to account for the transactions. The golden rules have been listed below:


What Are The 3 Golden Rules Of Accounting?


The golden rules of accounting makes it possible for anyone to be a bookkeeper. They only need to understand the different types of accounts and then apply the rules diligently.

1. Debit The Receiver, Credit The Giver


This type of accounting rule is used in the case of personal accounts. Personal account includes individual account, debtors and creditors account, etc. When a person gives something to the business, it becomes an inflow and therefore the person must be credit in the books of accounts. The opposite of this is also true, which is why the receiver needs to be debited.


2. Debit What Comes In, Credit What Goes Out


This type of accounting rule is only applied in case of real accounts. Real accounts involve accounts for assets e.g machinery, land and building etc. By default, they have a debit balance. Therefore, when you debit what comes in, you are adding to the already existing account balance. This is specifically what needs to be done in the books of account. Similarly when you credit what goes out, you are reducing the account balance when a tangible asset goes out of the business.


3. Debit All Expenses and Losses, Credit All Incomes and Gains


This accounting rule is applied when the account in question is a nominal account. Nominal accounts are account for expenses incurred, income received, loses and gains. The capital of the company is a liability, so it has a default credit balance. When all incomes and gains are credited, you increase the capital and by debiting expenses and losses, you decrease the capital. This is specifically what needed to be done for the system to stay in balance.


Conclusion


For Real Account:

  1. Dr - What comes in
  2. Cr - What goes out
Some Examples of this kind of transactions include cash/bank, Land and building and rent.

For Personal Account:

  1. Debit is the receiver.
  2. Credit is the giver.
Some examples of this kind of transactions are Vendor/Customer relations, debtors and creditors,  etc.

For Nominal Account:

  1. All gains and income are credit.
  2. All losses and expenses are debit.
Some examples of this kind of transactions are sales and/or purchases.

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2 Comments

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