Accounting is a powerful tool for understanding how your business works and where its strengths and weaknesses lie. It will let you see financial results in the detail that suits you best and drill down into the numbers for those items that interest you most. You can make all sorts of business mistakes if you don’t understand accounting. But if you master the basics, you’ll be miles ahead of most people. This is where the golden rules of accounting come in..
The golden rules of accounting are for making debits and credits to the general ledger accounts. A double-entry bookkeeping system is used in accounting to post transactions to two accounts. These two accounts are matched to verify that the appropriate amount has been recorded in each account. With these rules, you can analyze financial statements with ease and efficiency. These golden rules will help you keep track of the flow of money into and out of your business.
Before we dive into the details of these golden rules we should know that traditionally there are three different types of accounts.
- Personal accounts are accounts that relate to persons or individuals. For example, an account for a customer named James Jackson would be a personal account.
- Real accounts are accounts that relate to assets and properties owned by the company. For example, a company’s building is shown as a real account.
- Nominal accounts are all other types of accounts that do not fall into the above two categories. For example, electricity expense would be a nominal account.
Personal and real accounts are collectively called “balance sheet” accounts because they represent what your company has in terms of assets and liabilities at a given point in time. On the other hand the nominal accounts comprise the “income statement” portion of your accounting system.
Now, let us dive deep into Golden Rules of Accounting to know how they work.
The Golden Rules of Accounting serve as a set of rules that should be followed when dealing with transactions involving these three types of accounts.
The golden rules of accounting are for making such processes easier by standardizing them. 3 basic rules make up this structure:
- Debit The Receiver, Credit The Giver – This is applicable for personal accounts
- Debit What Comes In & Credit What Goes Out – This is applicable for Real accounts
- And, Debit All Expenses & Losses, Credit All Incomes & Gains – This is applicable for nominal accounts
So why are these golden rules of accounting so important?
The maintenance of proper transaction records and accounts is extremely crucial for any business of any size in any industry. This is where these golden rules of accounting play a major role:
1. Permanent records
In an organization, many transactions are conducted daily. The golden rules of accounting simplify the process of recording these transactions accurately in a short period. Hence instead of going through various reports from things like einvoice1 or the GST software you get all the information assimilated at one place. You can visit Khatabook to know about einvoice1.
2. Financial position
With a proper record of transactions using these rules, it is very easy for the investors and the shareholders to get a glimpse of the financial health of the company
3. Cost control
The records that are added to the ledger book based on these rules tend to be very transparent. Hence they make it easy for the manager to understand the expenses of the company and make strategies accordingly.
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