Every process has rules which are followed by all and are universally applicable. These rules carry significant value as they define core function and are the centre of focus. Similarly, the field of accounting too has certain stated rules known as the golden rules of accounting. The golden rules of accounting are –
Accounting practice can be traced from the Mesopotamian civilization. Luca Pacioli was the father of accounting and introduced the concept of double entry bookkeeping. Accounting stands for the practice of recording financial transactions and keeping the records in a systematic manner. Accounting includes updating the accounts on regular basis and providing an accurate picture of the financial condition of the company.
Accounting aims at providing clarity in the business transactions which further help the business in making decisions based on the cash flow, tax liabilities and expenses. Through accounting, three statements can be generated –
The accounting rules are applied in the ledger account which covers, the assets, liabilities, gains, incomes, losses, expenses, creditors, debtors to name a few. The accounts are divided into three ledger accounts.
Real account – The real accounts only include the transaction which is related to the business assets. Therefore, the golden rule associated with the real account will only be applicable to the sales, purchase, disposal, and depreciation of the assets. The golden rule for a real account is, the asset account is debited when they come into the business and credited when they go out of the business. For example, when machinery is purchased, then the machinery account is debited. When a product is sold, then the product account is credited.
Personal account – The personal account records the transactions which are related to any type of person. There are three types of persons–
Natural persons: Account of a human being is included in the personal account such as John’s account, William’s account and so on.
Artificial person: The accounts which are created by the law and do not exist in person are known as the artificial account. For example, a bank’s account, or business account.
Representative account: These accounts represent a group of people or an individual. For example, the prepaid expense account represents the payment made in advance to a particular group of people or an individual.
In the personal account, when the person receives anything from the business then, the person is debited. When the person gives something to the business, then they are credited. For example, if Mr. X receives a product from a business, then the business will debit Mr. X’s account. Similarly, when Mr X, pays the company and becomes a giver, then Mr. X’s account will be credited.
Nominal account – The accounts which are related to the expenses, profits, the payment received, and loss are included in the nominal account. The expenses and the losses encountered by the firm are debited. On other hand, the profits and the income by the business are credited. For example, the firm must pay salary to the employees which is an expense for the firm, post which the salary account will be debited. When the firm receives interest on their investment, interest is an income for the firm, therefore, the interest received account will be credited.