Golden Rules Of Accounting
Golden Rules of Accounting:
A good accounting system is to find the information about a transaction in a single entry. By looking into the nature of an element, the elements affected by the transaction we decide on what to debit and what to credit. Any account that is affected by transaction has to either debited or credited. To do this we have a set of rules used to apply the debit and credit.
The accounts are widely classified into three categories they are Real, Personal and Nominal Accounts. So we will see how debits and credits act on these accounts.
- Debit what comes in, Credit what goes out.
- Debit all expenses and losses, Credit all incomes and revenues.
- Debit the receiver, Credit the giver.
The real accounts related to accounts that are intangible like assets, reserves, capital, and liabilities whose balances are carried to next operational cycle are real accounts. The accounting rule that is used for this type of accounts are "debit what comes in" and "credit what goes out".
Say, if a building is bought from a person, debit the amount from the building account (real account) and credit it to the person account (personal account). Other scenario would be to sell a product on credit to a person, so credit the amount to product account(real account), debit it from the persons account(personal account).
The Nominal accounts are temporary accounts which are closed at the end of each year by moving their balances to Permanent accounts. Accounts that come under this type are expenses, gains, revenues, losses. The balance of these accounts becomes assets or losses at the end of year and moved to permanent accounts. The accounting rule that is used for this type of accounts is "Debit all expenses and losses" and "credit all incomes and gains".
While paying the salary to the employees in cash, the amount is debited from the salary account (nominal account). If a discount is got from a company then it is credited to the discounts account.
The Personal accounts are accounts that are related to a person or an organization. The accounting rule that is used for this type of accounts is "debit the benefit receiver" and "credit the benefit giver".
If some cash was paid to a person X. Then according to the rule the amount is debited from the person "X" accounts (personal account) and credit to the cash account. If a product is bought on credit from a company "Y", then the amount is credited to company "Y" account (personal account) and debited from the product account (Real Account).
So these are the "debit and credit" golden rules applied for accounting.