golden rules of accounting

Bookkeeping Basics: The Three Golden Rules

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In the field of accounting, maintenance of journal entries in the book of accounts is necessary. This information may be derived from long-term financial exchanges ranging months, or daily transactions in the form of a credit note and debit note. Basic accounting rules and their knowledge is a requirement to maintain transactional entries. The 3 golden rules of accounting, in short, the accounting golden rule, is followed in the world of trade and business. It is also known as the Universal or British Approach that follows the concept of debit and credit in order to classify its accounts. These concepts can be easily applied into practice by the use of an automated accounting software.    

Different countries in the world have different rules, such as the three golden rules of commerce, three golden rules of finance, and the golden rules of bookkeeping. To comprehend the 3 golden rules of accounting, Personal, Real, and Nominal Account have to be studied. Every account has to be understood in detail.     

1. Personal Account

An account related to a person, whether natural persons like individuals or artificial persons like companies, is a Personal Account. A person becomes a receiver if he or she receives anything from a business and his or her account is debited in the books of the business. A person becomes a giver if he or she gives anything to a business and his or her account is credited. If the personal account is allocated to an individual who raises invoices, the financial data may additionally be gotten from a credit note and debit note, depending on the consequences of the service.

The golden rule for a Personal Account – Debit the receiver and Credit the giver.  

2. Real Account

The closing balance is retained and carried forward at the end of the year in a Real Account. These carried forward amounts then become the opening balances for the next year and pertain to assets, liabilities and equity. If a business receives something of value (property or goods), it is represented in the books as debited. If something of value goes out from the business, it is represented in the books as credited.   

The golden rule for a Real Account – Debit what comes in and Credit what goes out.

3. Nominal Account

An account that relates to business expenses, loss, income, and gains is a Nominal Account. To manage and run a business, if a business incurs expenditure, the account of that expense is to be debited in the books of business. By rendering services or hiring business assets, an account of that income is to be credited when a business earns income. During the transaction of a sale or purchase of goods or assets, if the business incurs a loss, the account of that loss is to be debited in the books of assets. If the business earns profit during transactions of sale or purchase of goods or assets, the account of that profit is to be credited. 

The golden rule for a Nominal Account – Debit All Expenses and Losses and Credit All Incomes and Gains

An economic entity has to present its financial information to all its stakeholders. It must constitute all its transactions. As economic entities are compared to understand their financial statuses, uniformity in accounting is significant. The rules bring about uniformity and to account for the transactions correctly. They can be considered as the foundation of accounting. The journal entries must be passed based on the above rules, which is later summarized into a ledger account.  

Also Read: How To Start a Bookkeeping Business: A Step-by-Step Guide



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