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An easy explanation of the golden rules of accounting

by Madhuri Boinwad
An easy explanation of the golden rules of accounting

It’s a basic rule that all economic entities should show their financial details to their stakeholders. And the details provided by them have to be an accurate and authentic picture of the entity. Since economic items are compared to know their financial situations, there has to be regularity in accounting. To account for the transactions correctly and bring uniformity, you can learn about the golden rules of accounting and how it affects you at Khatabook.

But first, take a look at types of accounts. The classification of accounts applies to all kinds of general ledgers. Or you can say, every account will come in one of the most prominent classifications explained below.

Generally, there are 3 types of accounts:

  1. Personal Account

The Personal Account is a regular ledger account related to all persons like firms, associations, and individuals. A Creditor Account is an example of anyone’s personal account.

  1. Nominal Account

A Nominal account is known as a general ledger account about all expenses, income, gains, and losses. An interest Account is a perfect example of a Nominal Account.

  1. Real Account

It is a general ledger account connected to Liabilities and Assets other than a person’s accounts. And these accounts are carried forward and don’t close at year-end. A bank account is the best example of a Real Account.

GOLDEN RULES OF ACCOUNTING

The nature of every account is different, so accordingly, the set of Golden Rules varies. Basically, there are main 3 Golden Rules of Accounting.

For example, a company has done the following transactions.

  • Bank Deposits Rs.10,000
  • Buys items of Rs.50,000 from company A.
  • Sells the goods of Rs.35,000 to company B.
  • Pays rent of premises Rs.12,000.
  • And then earns Rs.3,000 on a bank account Interest.  

Initially, we will verify the accounts engaged in the entire transaction and divide them over various types of accounts.

  1. Bank Deposit of Rs.10,000

Bank Account is Real Account

Cash Account is Real Account

Both Cash and Bank are real accounts.

  1. Purchase items of Rs.50,000 from company A

Purchase Account is Nominal Account

Company A Account is Personal Account

  1. Sells the goods of Rs.35,000 to company B

Sales Account is Nominal Account

Company B Account is Personal Account

  1. Pays rent of premises Rs.12,000

Rent Account is Nominal Account

Bank Account is Real Account

  1. Earns Rs.3,000 on a bank account Interest

Interest received is Nominal Account

Bank Account is Real Account

All the activities of any entity must be considered. The entity should pass log entries that will compile into ledgers.

Golden rules of accounting allow the passing of journal entries.

  • Debit comes in, and credit goes out
  • Debit the receiver, credit the giver
  • Debit all expenses Credit all income

CONCLUSION

The above three are known as the Golden Rules of accounting. For accounting, when one does not know the golden rules, they can’t pass journal entries. Click here to know more about debit note in detail. It can provide you information regarding an upcoming serve or invoice as a reminder for money presently due.

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