Golden rules of Accounting

Introduction          

                                                All business entities must present it's financial statements to all its stakeholders. The information provided in the financial statement must be accurate and present in a true and fare picture of the entity. For this presentation, it must account all its transactions. Since economic entities are compared to understand their financial status, there has to be uniformity in accounting. To bring that uniformity, the golden rules of accounting will help us. These rules form the very basis of passing journal entries which is the first step of accounting and book keeping. 

Types of Accounts:

                            Let's discuss the three types of accounts in the Financial statement. 

1. Personal Account: 

                       Basically, a personal account of a General ledger related to people, firms, organization, association and companies. It can be divided into three sub categories:

          i) Natural personal Account: 

                       A natural personal account represents human beings. For example, a Capital Account, Drawings Account, Debtors Account, Creditors Account, Etc 

          ii) Artificial Personal Account: 

                       An artificial personal account represents bodies which are not human beings but act as separate legal entities according to the law. For example, government bodies, hospitals, Banks,companies Co-operatives, partnership, etc

          iii) Representative Personal Account: 

                      This type of personal account represents the accounts of either natural are artificial entities. However, the transactions in this type of account either belong to the previous year or the upcoming year For example prepaid expenses advance received. 

2. Real Account: 

                                    Real account contains the transactions related to the liabilities and Assets of a entity. the assets, in this case, can be further subdivided into tangible and intangible assets. Tangible assets include land, building, machinery furniture etc alternatively intangible assets include goodwill, patterns, copyright, etc. unlike a nominal account, a real account does not close when a financial year complete, rather it is carry forward to the following year. 

3. Nominal Account: 

                                    Nominal account is a general ledger containing the transactions of a business namely, expenses, incomes, profits and losses. It contains all the transactions that occurred in one financial year. Further more it resets to zero and starts a fresh when the next financial year begins. For example,  Commission received account, salary paid account, rent account and interest account. 

Golden Rules of Accounting:

                      The golden rules of accounting also known as the Three Golden Rules, are fundamental principles that govern recording financial tractions in their double entry system of book keeping. Those are

1. Debit the receiver, Credit the giver: 

                      This rule applies to the personal account. When you receive something, you debit the account, when you give something you credit the account. For example, when you receive the cash you would debit the cash account, if you give cash, you would credit the cash account. 

2. Debit What comes In, Credit What goes Out: 

                       This rule is for real accounts where tangible assets like Machinery, Buildings, Land, Furniture etc are taken into account. They have a debit balance by default and debit everything which comes in and adding to existing assets and credit everything which goes out. 

3. Debit the expenses and losses, Credit the profits and gains: 

                         This Golden Rule is for Nominal Accounts. It considers a entity's capital account as a Liability and shows a credit balance. As a result of incomes and gains the capital will increase, So we have to credit the incomes and gaings. Inversely, this capital gets reduced when losses and expenses are debited from it. 

                                 It is important to note that all transactions involve atleast two accounts. One is debited another one is credited. This double entry system ensures that the accounting equation "Assets = Liabilities + Equity" remains same in the balance sheet after each transactions.