The Golden Rules of Accounting & Application | DGSGCA Guidance Booklet

Introduction

Accounting is a subject which one should assume as the language of any business entity. This includes the fundamental principles of guidance for the accounting professionals. The beneficiary also includes the chartered accountants. The principles are recording and reporting financial transactions accurately and consistently. Among these principles we can identify the golden rules of accounting, which form the bedrock of the double-entry bookkeeping system. No matter if you’re a seasoned professional or a beginner, your understanding of these rules is essential. Let’s dive further into the golden rules of accounting and explore how they apply to different types of accounts.

What are the Golden Rules of Accounting?

The golden rules of accounting are the profound principles that govern how the financial transactions should be recorded or interpreted. Following is the classification based on the types of accounts involved in the transactions:

1. Personal Accounts
2. Real Accounts
3. Nominal Accounts

Each type of account has a specific rule associated with it, ensuring that all financial transactions are recorded systematically.

1. Personal Accounts

The Rule: Debit the receiver, Credit the giver

Personal accounts relate to individuals, firms, and companies. These accounts keep track of transactions with any person or entity.

• Debit the receiver: When someone receives something, their account is debited. For example, if you pay rent to your landlord, you debit the landlord’s account because they are the receiver.
• Credit the giver: Conversely, when someone gives something, their account is credited. Using the same example, your bank account or cash account is credited because you are the giver.

Example:

• You pay ₹500 to a supplier.
  • Debit: Supplier’s Account ₹500
  • Credit: Cash/Bank Account ₹500

2. Real Accounts

The Rule: Debit what comes in, Credit what goes out

Real accounts pertain to assets and liabilities, excluding individuals and organizations. These accounts reflect tangible and intangible possessions.

• Debit what comes in: When an asset is acquired, the respective account is debited. For instance, if you purchase furniture for your office, you debit the furniture account.
• Credit what goes out: When an asset is disposed of, the respective account is credited. If you sell a piece of machinery, you credit the machinery account.

Example:

• You purchase office equipment worth ₹1,000.
  • Debit: Office Equipment Account ₹1,000
  • Credit: Cash/Bank Account ₹1,000

3. Nominal Accounts

The Rule: Debit all expenses and losses, Credit all incomes and gains

Nominal accounts record expenses, losses, incomes, and gains. They are temporary accounts that are closed at the end of each accounting period.

• Debit all expenses and losses: When a business incurs an expense or a loss, the respective account is debited. For example, if you pay for office supplies, you debit the office supplies account.
• Credit all incomes and gains: When a business earns income or gains, the respective account is credited. If you receive interest from a bank deposit, you credit the interest income account.

Example:

• You receive ₹200 as interest from a bank deposit.
  • Debit: Bank Account ₹200
  • Credit: Interest Income Account ₹200

Why are the Golden Rules of Accounting Important to follow?

There are many theories behind this but in our opinion the golden rules of accounting are crucial because it help us to:

• Ensure Consistency: By following these rules, businesses can maintain consistency in their financial records, making it easier to track and analyze financial data over time.
• Enhance Accuracy: These rules help in accurately recording transactions, reducing the likelihood of errors and discrepancies.
• Facilitate Auditing: Consistent and accurate records make the auditing process more straightforward and efficient.
• Aid in Decision Making: Accurate financial records provide a solid foundation for making informed business decisions.

Practice of Applying the Golden Rules in Real-life

We effectively apply the golden rules of accounting by doing the following process of ART:

1. (A) We Identify the Types of Accounts: Determine whether the accounts involved in a transaction are personal, real, or nominal.
2. (R) We Apply the Relevant Rule: Use the corresponding golden rule to decide which accounts to debit and credit.
3. (T) We Record the Transaction: Make the appropriate entries in the accounting system, ensuring that debits equal credits to maintain the balance.

Conclusion

The golden rules of accounting are timeless principles that ensure the accuracy and consistency of financial records. By understanding and applying these rules, DGSGCA assists a business to maintain reliable financial data. This becomes crucial for tracking performance, making strategic decisions, and ensuring regulatory compliance. We suggest to every business entity, a small business or overseeing a large corporation, to follow the foundational rules. Finally, this will act as an indispensable tool in your accounting arsenal.