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The Golden Rule of life states that you should serve people like you want to be served in return. But did you know that accounting also has a golden rule? In actuality, there are three golden accounting rules.
Keep your accounts accurate and up to date by adhering to the three fundamental accounting principles.
There are three accounting maxims.It’s no secret that credits and debits rule the accounting world. The economic engine of a book is its debits and credits.
Before we get into the golden accounting standards, you must review every credit and debit.Debits and credits are identical but opposed entries in your accounting books. The five main types of accounts are affected by credits and debits:
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- Assets: Resources that a company has and may sell for money (e.g., land, equipment, cash, vehicles)
- Expenses: Charges incurred when conducting business (e.g., wages, supplies)
- Liabilities: Amounts due to another individual or company (e.g., accounts payable)
- Equity: Assets minus liabilities
- Revenue and income: Funds received from sales.
For each transaction, you must keep track of the credits and debits.
Debits and credits are also crucial to accounting’s fundamental principles. Look at the following three basic accounting principles:
Subtract from the giver and credit the receiver.
Debit what’s received and credit what’s expended
Debit losses and expenses, credit profits and income
Now, let’s dive into the golden rules of accounts.
- Pay the giver a credit and debit the recipient.
Personal accounts are subject to debiting the recipient and crediting the giver. A general ledger account that pertains to a particular person or group of people is referred to as a personal account.
Debit the account if you receive something. Credit the bill if you donate.
- Debit what’s received and credit what’s expended
Use the second golden rule while analyzing real accounts. Permanent accounts are another name for real accounts. At year’s end, real accounts don’t close. Their remaining balances are instead carried over to the upcoming accounting quarter.
Asset, liability, or equity accounts are all examples of real accounts. Accounts for contra assets, liabilities, and equity are also included in existing accounts.
- Debit losses and expenses, credit profits and income
Nominal accounts are covered by the accounting profession’s final golden rule. You close a nominal account after each accounting period. Temporary accounts are another name for nominal accounts. Revenue, expense, and gain and loss accounts are examples of temporary or nominal accounts.
If your company incurs expenses or suffers a loss, debit the account using nominal charges. Conversely, credit the account if your company has to record income or gain.
OVERVIEW
The rules of debit and credit are what essentially govern the accounting world. The world of accounting would be a chaotic muddle without these rules. Therefore, if you wish a guarantee of the correctness of results shown by such books of accounts, the accounts must be maintained accordingly.
I hope this post helped you fully comprehend the three guiding principles of accounting. Remember that each of these three accounts is responsible for the transactions. You can relate different types of accounts to them based on accounting rules and determine which version is credited or debited.
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