3 Golden Rules of Accounting | Types and Examples (2024)

Bookkeeping is only one aspect of financial accounting. Every transaction in accounting has two entries: debit and credit. It is critical to determine which accounts must be credited and which must be debited. This is the dual entry accounting system.

The 3 golden rules of accounting are rules that govern financial accounting. These golden standards ensure that financial transactions are recorded in a systematic manner.

The golden rules reduce complex bookkeeping procedures to a collection of concepts that are simple to understand, study, and apply. Here are the golden rules of accounting with examples in detail.

Kinds of Accounts

Accounting's golden rules aid in the documentation of financial transactions in ledgers. These golden guidelines differ depending on the type of account.

Each transaction would have a debit and a credit entry and will be assigned to one of the three types of accounts shown below.

  • Nominal Account

A nominal account is a normal ledger account that records all income, expenses, profits, and losses for a business. It records all transactions for a single fiscal year. The balances are reset to zero and the process can begin again. A nominal account is one that pays interest.

  • Real Account

A real account is a normal ledger account that can record all the assets and liabilities. It has both - actual and intangible assets. Tangible assets include furniture, land, buildings, machinery, and so on. Intangible assets, on the other hand, such as goodwill, copyright, patents, and so on.

As real accounts are carried forward to the next fiscal year, they are not closed at the end. In addition, a real account shows on the balance sheet. A form of real account is a furniture account.

  • Personal Account

A personal account is a general ledger account that pertains to individuals. It can be natural persons - such as humans, or artificial persons, like corporations, firms, associations, and so on.

Company A comes as the receiver when it gets funds or credit from another firm or individual. In the event of a personal account, the other business or individual who contributes to it becomes the giver. A personal account is a creditor account.

Golden Rules of Accounting

Following are the 3 rules of accounting-

1) Rule One

"Debit what comes in - credit what goes out."

This legislation applies to existing accounts. Accurate replicas include furniture, land, buildings, machines, and so on. By default, they have a negative balance. They are debiting what is arriving in order to enhance the balance of the current account.

2) Rule Two

"Credit the giver and Debit the Receiver."

It is a rule for personal accounts. When someone, genuine or fictitious, contributes to the business, it counts as an inflow, and the giver must be noted in the records. However, the receiver must be acknowledged. Consider purchasing a gift from a gift shop. Your account will be updated to reflect the transaction.

3) Rule Three

"Credit all income and debit all expenses."

This regulation applies to nominal accounts. A company's capital is its obligation. It has a credit balance. If all earnings and profits are credited, the capital will increase. When losses and costs are deducted, the capital declines.

Benefits of Accounting Procedures

Maintaining financial transaction accounts in accordance with accounting's golden standards provides some benefits.

  • Maintenance of Business Records - Maintaining business records is crucial to a company's success. Accounting makes sure that all of the business transactions are documented in a secure location in the correct order and, more significantly, in a methodical manner.
  • Business Valuation - A solid accounting procedure aids in correct business valuation, allowing for more investment and expansion.
  • Budgeting and Future Projections - A healthy budget based on proper accounting processes may provide a solid foundation for any organization to grow. With a solid accounting process in place, future estimates are more accurate.
  • Financial Statement Preparation - If the golden rules of accounting are followed, financial transactions will be recorded correctly. If the accounting is done correctly - financial statements like profit and loss statements, trading accounts, and balance sheets could all be created rapidly.
  • Comparison of Financial Results - Accounting done according to the golden principles makes it easy to compare one year's financial outcomes to another. Analysis of year-on-year financial performance becomes simpler and more reliable.
  • Regulatory Compliance - Accounting is critical for organizations in order to comply with regulatory bodies. It would be hard to accomplish regulatory compliance without the basic basis laid down by the accounting rules.
  • Aids in Taxation Matters - Tax shortfalls caused by faulty accounting methods may result in substantial penalties from government agencies, negatively harming image and brand value.
  • Corporate Decision-Making - The accounting procedure based on the accounting rules ensures that financial data are trustworthy and valuable in the decision-making procedure of senior management.

Who is Mandated to Follow the Books of Accounts?

Any firm with receipts of more than Rs. 1.5 lakhs in the three years before an established profession must keep a record of the financial transactions in accordance with accounting's golden principles.

Based on the Rule 6F of the Income Tax Act - the following professions must keep financial records-

  • Legal
  • Technical Consultation
  • Architectural
  • Engineering
  • Accountancy
  • Authorized Representative
  • Film Artists
  • Medical
  • Interior Decoration
  • Company Secretary

A professional is not required to keep books of accounts under section 44AA of the Income Tax Act if his or her professional receipts do not exceed Rs. 1,50,000 in any of the previous three years. In such a case, the professional must keep books of accounts that an Accounts Officer can use to calculate taxable income.

Fundamental of the Golden Rules of Accounting

The essential accounting principles are as follows-

  • Futuristic Approach

A firm is considered to exist in perpetuity. The only way to cease it once it has established itself is to split it. As a result, accountants make use of the concept of a going concern.

This assumption suggests that the company will continue as usual until the conclusion of the next accounting period and that there is no contradictory information. Since the going concern principle, businesses can operate on credit, account for future receivables and payables, and charge depreciation if the machine would be used for a long time.

If management knows that activities will be suspended soon, standard accounting will be discontinued. For dissolution purposes, a special type of accounting is used.

  • Monetary Approach

Accounting, unlike trading, cannot account for items in the same way because all values must be documented in terms of a single monetary unit. Because products and items are essentially subjective, assigning valuations to them becomes problematic. Accounting, on the other hand, has regulations in place to address the problem.

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  • Pricing Approach

The cost idea is inextricably linked with the conservative philosophy. Businesses should reflect all costs on their financial statements according to the cost principle. Land, houses, gold, and other commodities generally appreciate in value. However, the accountants will not allow this appreciation to appear on the company's financial records until it has been realized.

Accountants believe that the market worth of something is merely a subjective judgment. There are so many different points of view that accountants cannot account for them all. It is true since something was purchased and the selling price was verified. As a result, accounting is built on the cost principle and facts.

  • Conservatism Approach

Accountants are expected to be cautious by nature. They want to hope for the best while preparing for the worse. This is evident in the standards they have set for their profession. Conservatism is an important concept in accounting.

When the number of expected inflow number flows is unpredictable, the organization must identify the lowest possible revenue and the most significant potential expenses using this approach.

3 Golden Rules of Accounting | Types and Examples (2024)

FAQs

3 Golden Rules of Accounting | Types and Examples? ›

The three golden rules of accounting are (1) debit all expenses and losses, credit all incomes and gains, (2) debit the receiver, credit the giver, and (3) debit what comes in, credit what goes out. These rules are the basis of double-entry accounting, first attributed to Luca Pacioli.

What are the 3 types of accounts with examples and golden rules of accounts? ›

Golden rules of accounting
Type of AccountGolden Rule
Personal AccountDebit the receiver, Credit the giver
Real AccountDebit what comes in, Credit what goes out
Nominal AccountDebit all expenses and losses, Credit all incomes and gains

What is an example of the golden rule? ›

"Everything you should do you will find in this: Do nothing to others that would hurt you if it were done to you." "Do not offend others as you would not want to be offended." "The successes of your neighbor and their losses will be to you as if they are your own."

What are the 3 main types of accounting? ›

The three types of accounting include cost, managerial, and financial accounting.

What are the 3 basic accounting principles? ›

Some of the most fundamental accounting principles include the following: Accrual principle. Conservatism principle. Consistency principle.

What are the examples of nominal and real accounts? ›

Examples of nominal accounts include sales, salary expense, rent expense, interest income, and depreciation expense. Real Accounts: These accounts relate to assets, liabilities, and equity (other than the drawing account), i.e., all accounts that appear on the balance sheet.

What is real nominal and personal account with examples? ›

Real accounts record the assets, liabilities, and owner's equity of a business, personal accounts record the transactions of individuals and organizations, and nominal accounts record the expenses, revenues, gains, and losses of a business.

What is the most popular golden rule? ›

It is a rule that aims to help people behave toward each other in a way that is morally good. The Golden Rule is often written as, ''treat others how you want to be treated'' or, ''do unto others as you would have them do unto you.

What is the earliest example of the Golden Rule? ›

As for Judaism, we can read the Golden Rule for the first time in the Book of Tobias, dated 200 BC, but Jesus Christ has turned it into a positive sentence: “Do unto others as you would have them do unto you”.

What is the Golden Rule simplified? ›

Most people grew up with the old adage: "Do unto others as you would have them do unto you." Best known as the “golden rule”, it simply means you should treat others as you'd like to be treated.

What are the 3 meaning of accounting? ›

According to Bierman and Drebin:” Accounting may be defined as identifying, measuring, recording and communicating of financial information.”

What are basic accounting types? ›

Typically, businesses use many types of accounts to keep track of their financial information and current value. These can include asset, expense, income, liability and equity accounts. You may use each account for a different purpose and maintain them on your financial ledger or balance sheet continuously.

What are the golden rules and principles of accounting? ›

Every economic entity must present accurate financial information. To achieve this, the entity must follow three Golden Rules of Accounting: Debit all expenses/Credit all income; Debit receiver/Credit giver; and Debit what comes in/Credit what goes out.

What are the 3 areas types of accounts on a balance sheet and what do each one represent? ›

As an overview of the company's financial position, the balance sheet consists of three major sections: (1) the assets, which are probable future economic benefits owned or controlled by the entity; (2) the liabilities, which are probable future sacrifices of economic benefits; and (3) the owners' equity, calculated as ...

What is the meaning of golden rules of accounts? ›

Each type of account has its own set of rules that needs to be applied for each transaction. Following are the three golden rules of accounting: Debit What Comes In, Credit What Goes Out. Debit the Receiver, Credit the Giver. Debit All Expenses and Losses, Credit all Incomes and Gains.

What are the golden rules of debit and credit for different accounts? ›

Before we analyse further, we should know the three renowned brilliant principles of bookkeeping: Firstly: Debit what comes in and credit what goes out. Secondly: Debit all expenses and credit all incomes and gains. Thirdly: Debit the Receiver, Credit the giver.

What is the real account with example? ›

Real accounts represent assets, liabilities, shareholder's equity or capital. Examples of Real accounts are cash, furniture, machinery, loans, banks, investments, land, equity, etc. A Real account is a general ledger account that does not close at the end of the accounting year.

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