Avail the advantage of their quick understanding with easy examples
golden rules of accounting (edulyte.com)
A budding chartered accountant should be an expert in the golden rules of accounting. Any and every account follows these golden rules.
Read our blog to become
familiar with these standards of accounting.
So you are thinking of being an accountant, a number crusher, and a bookkeeper. If you wish to become an accountancy wizard, you should know that an accountant handles all the financial records of a company or organisation.
A specific set of rules has been established to bring uniformity in the maintenance of accounts and the necessary calculations regarding finances. These core fundamentals
are called the Golden Rules of Accounting.
How to understand the Golden Rules of Accounting?
Accounting is all about debit and credit, And they form the foundation of all the transactions. To comprehend the golden rules of accounting, you require a firm grasp of Debit and Credit and their role in different accounts.
The different types of accounts are:
- Personal Accounts
- Impersonal Accounts
Personal Accounts
deals with persons and artificial judicial accounts like companies, government organisations, etc. The personal accounting rules can be comprehended better if you know the types of personal accounts.
Natural Personal Account:
are for real human beings, including debtors,
creditors, proprietors,
etc.
Artificial Personal Account:
includes all businesses, as they are a separate legal entity in the law. They are different from humans. Examples are Social Club Account, Disaster Relief Charitable Trust Account, etc.
Representative Personal Account:
representing a person or a group like Capital Account, Prepaid Expenses account, Outstanding Liability Account and so on.
The golden rules of accounts have to be understood in the context of these accounts. We have prepared an easy way for you to remember the rules and how they vary for each account.
| Type of Account | Golden Rule |
|---|---|
| Personal | â—Ź Debit the receiver â—Ź Credit the giver |
| Real | â—Ź Debit what comes to business â—Ź Credit what goes out of business |
| Nominal | â—Ź Debit the expense or loss of business â—Ź Credit the income or gains of business |
Applying Golden Rules of Accounting in Real Life
The golden rules of accounting have many uses and advantages in our day-to-day life.
- Maintaining records: Financial records are crucial for every organisation, and the golden rules of accounting help do that.
- Recording of transactions: Accounting ensures that your business transactions are recorded in a secure location, in the proper order, and, more importantly, systematically.
- Financial statement preparation – To record financial transactions effectively, you require the golden rules of accounting. Profit and loss accounts, balance sheets, etc., can be created without the assistance of the golden rules.
- Comparison of financial results – To rapidly compare and understand the financial outcomes over the years, accountants use the golden principles of accounting. The rules make the whole process reliable.
- Corporate decision-making: Senior management expects tha financial data is definitive and accurate to enable the decision-making process. And the golden standards of accounting come in handy to create valid data.
- Evidence in Legal Cases: The golden rules are applied to the financial data to avoid the hassle of dealing with confusing financial and business figures during legal issues. They help in creating and storing the data in an organised manner
- Regulatory compliance: Regulatory bodies expect organisations to comply with the set norms, and it would not be possible for the organisation to do so without the rules.
- Helps with tax issues: Tax filing gone wrong due to substandard accounting practices can harm an organisation tremendously. So to ensure that the brand value and image are not harmed, the accounting rules have to be followed.
- Business valuation: A genuine accounting practice aids in building a company’s reputation in the market and getting more investment.
- Budgeting and Future Projections: A budget supported by solid accounting principles helps a company’s growth and expansion.
Let’s understand 3 Golden Rules of Accounting with examples
There are a few guidelines you should keep in mind while using these 3 golden rules of accounting, which are as follows:
- Check to see what type of account is being used in the transaction.
- Check whether the transaction adds or subtracts from the account’s value.
- With these three accounting golden standards, you can keep your accounts updated and correct.
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