Accounting is a fundamental process in financial management that involves recording, classifying, summarizing, analyzing, and interpreting financial transactions. It provides stakeholders with an accurate and reliable understanding of a company’s financial position. In this article, we will explore the golden rules of accounting and the different types of accounts. We will also discuss the benefits of following these rules and how they can help businesses maintain accurate records, avoid errors, and comply with regulatory requirements.
Accounting is the process of recording, classifying, summarizing, analyzing, and interpreting the financial transactions of a business or organization. The primary purpose of accounting is to provide an accurate and reliable financial position of the company to its stakeholders. These stakeholders may include investors, creditors, management, employees, and other interested parties.
The golden rules of accounting ensure that financial statements are recorded in a systematic manner. These rules are based on the dual entry system, where each transaction has a corresponding debit and credit entry. It is important to identify which accounts should be charged and which should be credited. If you follow these rules, you can easily determine which account to credit and which to debit. The three principles of the accounting golden rules simplify the complicated rules of bookkeeping. Each type of accounting has its own set of rules that are required to be applied to every financial transaction.
The following are the three types of accounts:
Nominal accounts are also known as income statement accounts. This type of accounting is a normal ledger account that is related to all the expenses, profits, income, and losses of the company. Examples of nominal accounts include salaries, rent, advertising expenses, interest, and commission.
Personal accounts are used to record transactions related to individuals or organizations with whom the company has financial dealings. Examples of personal accounts include suppliers, customers, creditors, debtors, and banks. Under the personal account, there are three subcategories:
The real account is also the normal ledger, just like the other two types of accounting in the accounting system. They are used to record transactions related to the company’s assets, liabilities, and capital. Examples of real accounts include cash, inventory, land, buildings, equipment, accounts payable, accounts receivable, and owner’s equity.
The following are the 3 golden rules of accounting:
This accounting rule applies to nominal accounts and regards a company’s capital as a liability, resulting in a credit balance. When gains and income are credited, the capital increases. Conversely, debiting losses and expenses reduce the capital balance.
For example, Company A pays the rent worth Rs. 28,000 on 3rd April 2023. This transaction will be recorded as follows:
Date |
Account |
Debit |
Credit |
3/4/2023 |
Rent Account |
28,000 |
__ |
3/4/2023 |
Cash Account |
__ |
28,000 |
According to Rule 2 of accounting, the concept of “Debit is the receiver, credit is the giver” applies to personal accounts. When an individual or an entity donates something to an NGO, it leads to an inflow, and as per accounting principles, the person or entity making the donation should be credited to the books. Conversely, the recipient should be debited to record the transaction accurately.
For example, Company A donates Rs. 1,00,000 in cash to NGO on 23rd February 2023. This transaction will be recorded as follows:
Date |
Account |
Debit |
Credit |
23/2/2023 |
NGO Account |
1,00,00 |
__ |
23/2/2023 |
Cash Account |
__ |
1,00,00 |
This rule of accounting applies to real accounts where tangible assets such as furniture, land, buildings, etc. are taken into account. These accounts have a by default debiting balance, where everything that comes in is added to the existing balance. Similarly, when a tangible asset departs from the company, the corresponding account balance should be credited.
For example, Company A sells its machinery for Rs. 40,000 on 2nd February 2023. This transaction will be recorded as follows:
Date |
Account |
Debit |
Credit |
2/2/2023 |
Machinery Account |
40,000 |
__ |
2/2/2023 |
Cash Account |
__ |
40,000 |
The following are the benefits of the golden rules of accounting:
In conclusion, accounting is the backbone of financial management for businesses and organizations. By following the golden rules of accounting, companies can maintain accurate records, make informed financial decisions, and comply with regulatory requirements. As businesses strive for financial success, understanding and implementing the golden rules of accounting are essential for maintaining transparent and reliable financial information.
Changing Your Business Name: Why MSME Registration Doesn't Allow Name Updates? Introduction When businesses rebrand, the first question many ask…
Highlights of the 56th GST Council Meeting held in September 2025 Introduction The 56th GST Council Meeting, chaired by Union…
Can we apply for Logo and Wordmark Registration in Single Application? Introduction Businesses often wonder whether they can register both…
Compliance Calendar for the Month of October 2025 Introduction As October 2025 approaches, it is crucial for businesses, professionals, and…
Can I Use Different Colour Combinations After Applying Logo as a TM Application? Introduction When it comes to protecting your…
FLA Return Filing for NRI Investment via NRO Account: Is It Mandatory? The FLA return NRI NRO investment applicability query…
Leave a Comment