Golden Rules of Accounting

Life is tough, but if you stick to the rules, you can avoid trouble. Likewise, business accounting has some golden rules that accountants should follow to create accurate financial records. 

Accurate financial records serve as a business’s backbone, but only if they are accurate and showcase the company’s true financial health. 

This is exactly why we need to know the three golden accounting rules to ensure accuracy and transparency in our financial records.

There are no surprises here. In the read ahead, we’ll unveil the golden rules of accounting with examples so you can easily implement them.

What Are The Golden Rules of Accounting?

To put it simply, the golden rules serve as guidelines that accountants and professionals should follow for the precise recording of business transactions. Without these rules, accountants may be dubious about which entries to record first and which transactions should be debit and which ones should be credit.

Don’t be horrified by these rules, thinking they may complicate your process; instead, they seek to simplify the complex rules and make it easy to record transactions. Before implementing these principles, you must identify the type of account, as each type has different rules for every transaction.

So before knowing about the golden rules, let’s first understand the three types of accounts:

Nominal Account

A nominal account is a temporary account that measures a business’s temporary transactions, such as expenses, gains, losses, and incomes, for one fiscal year. These accounts close at the end of each fiscal year, and balances are transferred to the profit and loss account. Examples of nominal accounts include salary accounts, gains and losses accounts, etc.

Personal Account

As the name suggests, a personal account is your friendly ledger where you can record your transactions. These transactions may include listing down business assets, expenses, and owner’s equity. Examples of such accounts include Savings accounts, Personal loan accounts, etc.

Real Account

Unlike nominal accounts, real accounts always remain part of the company’s financial records once they’re opened. Their balances are accumulated and carried forward at the end of each financial year. Examples of such accounts include Balance sheet accounts.

What Are Golden Rules of Accounting With Examples

Now that you have understood the types of accounts, it is time to unravel the golden rules with examples. Before jumping on to the first one, I’d like to explain that every rule may not fit perfectly for each account. So, we’ll simplify which one is best for each account, simplifying the bookkeeping process for the business.

Debit the Expenses and Credit the Gains

According to accounting laws, the debit and credits of a business must balance each other. Debits are money that can be used to cover up business expenses,, while credits account for the money coming into the business account. As a rule, costs and losses, including raw materials, salaries, etc, are debited as they reduce stockholder equity. However, gains include the company’s money from its various operations, which is credited. This rule applies to nominal accounts; let’s look at its example to understand it better.

Example:

Assume that your business earns from selling equipment worth £1000. The cash received from the purchases will be debited as it increases our assets, and the income from the sale will be credited.

Debit the Receiver and Credit the Giver

Debitting the receiver and credit the giver is a crucial rule applied to personal accounts. According to this rule, you can account for transactions between two parties by debiting the amount received by the business. On the other hand, when the business gives something, its amount is recorded under credit.

Example:
Imagine your business pays £800 to purchase raw materials from farmers. In the transaction, the farmer is the giver (providing raw material), and your business is the receiver (benefiting from the raw material). Hence, we’ll debit the purchases and credit the amount utilized for the purchases.

Debit What Comes In and Credit What Goes Out 

The final golden rule states that all money coming into the account must be debited, while the money going out should be credited. Money coming in will be a part of the company’s assets, so it should be debited; however, the money going into the business’s account is a liability, so it should be credited. The rule can be easily implemented with real accounts; the example below will help you understand how.

Example:

Assume the business purchased 9

New Newhinery for £2000. Buying machinery(comes in) increases the company’s assets, so it’s recorded as a debit. On the contrary, the cash paid to purchase machinery (goes out) is credit as it reflects the cash flow that the company no longer possesses.

Benefits of Accounting Rules

The three basic accounting rules are the backbone of every financial statement, ensuring precision and transparency in maintaining financial records. Suppose you follow these rules and understand how to implement them. There are various benefits of following accounting rules, such as:

• Smarter decision-making is achieved by understanding financial statements and showcasing the business’s economic health.
  
• Accurate financial reporting and maintaining accurate records.
  
• Business compliance with accounting standards prevents businesses from penalties.
  
• Transparency in financial statements increases business credibility for auditing.
  
• Allows businesses to compare their financial performance over time.

How Ross Mckinley Can Help?

It’s best to remember these accounting golden rules with examples to keep a check on your financial records. However, only a professional can create financial statements and maintain accurate financial records.

So, why increase your financial worries when you can outsource your finances to Ross McKinley? We have a dedicated team of accountants to cater to all your financial issues. You can visit our website or schedule a consultation to discuss your business’s financial planning.

Either way, our services are available 24/7 to offer you peace of mind when you know you have control over your finances. We not only give you strategic financial direction but also ensure there are no hurdles along the way.