You may have learned in life about the Golden Rule: Treat how you’d like to be treated. But, did you guys know there is a golden accounting, too?
Basically, there are three golden rules of accounting. Yet none of them deals with your accounts the manner they need to be handled.
If you’d like to keep your records open and correct, obey the three simple accounting principles and yes everyone in this field follows it whether its an accounting firm or a professional.
3 Golden Rules of Accounting Explained
Lets talk about the 3 golden rules of accounting with examples.
Debit the receiver and credit the giver
The concept of debiting the recipient and the crediting the giver is based on personal accounts. A personal account is a general ledger account that relates to people or organizations.
If you get something, just debit your account. If you’re giving something, then credit your account.
For example, you purchased goods worth $50 from XYZ Ltd. So in your books, you will debit your purchase account (Debit the receiver) and credit the company XYZ (Credit the giver).
So your purchase account will look like –
Debit what comes in and credit what goes out
Using the second Golden rule for real accounts. A real account may be an account of assets, liability, or equity.
Real accounts are also called permanent accounts. Real accounts never get closed at year-end and their balances are carried to the next accounting year.
In case of a real account, when something comes in your business like an asset then debit it and credit what goes out of your business.
As an example – Your company purchased a plant of $100 cash. Then debit your plant account (debit what comes in) and credit the cash (credit what goes out).
Debit expenses and losses, credit income and gains
This rule is for nominal accounts. Nominal accounts are those accounts that you have to close at the end of the accounting period. The nominal, account includes revenue, expenses, gains, and loss.
In the case of a nominal account, you debit the account if you have loss and credit the account if your business gets an income.
For example, you purchase goods of $600 from company A. So in the purchase account you debit goods and in the cash account, you credit the income.