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.
