Golden Rules of Accounting

Accounting

In earlier post we have seen three types of accounts. Here we will learn about Golden rules of accounting. Accounting is the measurement, processing, and communication of financial and non-financial information about economic entities such as businesses and corporations. The accounting department analyze all the statistical data for preparation of Financial accounts.

Golden Rules of Accounting:

The golden rules of accounting require that you ascertain the type of account in question. Each account type has its rule that needs to be applied to account for the transactions. The golden rules have been listed below:

• Debit The Receiver, Credit The Giver
• Debit What Comes In, Credit What Goes Out
• Debit All Expenses And Losses , Credit All Incomes And Gains

Debit The Receiver, Credit The Giver

                                           This principle is used in the case of personal account. When a person gives something to the organization, it becomes an inflow and therefore the person must be credit in the books od accounts. The converse of this is also true, which is  why the receiver needs to be debited.

Debit What Comes In, Credit What Goes Out:

                                               This principle is applied in case of real accounts. Real accounts involve machinery, land and building etc. They have a debit balance by default. Thus when you debit what comes in, you are adding to the existing account balance. This is exactly what needs to be done. Similarly when you credit what goes out, you are reducing the account balance when a tangible asset goes out of the organization.
                                              

Debit All Expenses And Losses, Credit All Incomes And Gains

                                        This rule is applied when the account in question is a nominal account. The capital of the company is a liability. Therefore it has a default credit balance. When you credit all incomes and gains, you increase the capital and by debiting expenses and losses, you decrease the capital. This is exactly what needs to be done for the system to stay in balance.

In this post we have learnt regarding Golden rules of accounting soon we will get back with new post.