The accounting department plays a critical role in any business because it provides information to the finance, tax, and management teams on how to run the business. A well-organized and properly maintained accounting department will enable the finance and tax teams to perform well.
An accounting led by someone who is knowledgeable, unbiased, and/or has a vision can be very helpful. In today’s post, we are going to share with you the three golden rules of accounting with examples so you learn how to apply these rules in your business.
Following these three golden rules of accounting will help to ensure that a company’s financial records are accurate and up-to-date. This, in turn, will help the company make sound financial decisions and avoid any potential legal problems.
Rule 1: Debit the receiver, credit the giver
When you’re recording a transaction in your accounting books, you need to debit the party who receives the goods or services (the receiver) and credit the party who provides the goods or services (the giver). This rule is based on the principle that when one party gives something to another, there is an equal and opposite transaction taking place.
Example: Let’s say you went to the store and bought a new shirt. In order to record this transaction, you would debit the “clothing” account (which represents the shirt you bought) and credit the “cash” account (which represents the money you paid for the shirt). This rule is important to follow because it helps to keep transactions organized and ensures that the books are balanced.
Must read: Why Do Small Businesses Need Digital Marketing
Rule 2: Debit what comes in, credit what goes out
This rule is based on the concept of flow: what comes in (asset) must flow out (liability or equity), and what goes out (liability or equity) must flow in (asset). The main idea is to keep track of the inflows and outflows of money in your business.
Example: When a company receives cash from a customer, the company will debit the Cash account and credit the Accounts Receivable account. When a company pays cash to a supplier, the company will debit the Accounts Payable account and credit the Cash account.
Rule 3: Debit all expenses and losses and credit all incomes and gains
This rule is based on the principle that all expenses and losses must be debited, and all incomes and gains must be credited. This ensures that your books are balanced and that your business is profitable.
Example: If a company spends $1,000 on office supplies, the office supplies asset account is debited for $1,000 and the cash account is credited for $1,000. Similarly, if the company earns $5,000 in revenue, the cash account is debited for $5,000 and the revenue account is credited for $5,000.
Must read: What Exactly is Inbound Marketing?
FAQs on golden rules of accounting:
What are the 3 golden rules of accounting?
Rule 2 – Debit what comes in, credit what goes out.
Rule 3 – Debit all expenses and losses and credit all incomes and gains.
What are the 10 golden rules of accounting?
The 10 golden rules are:
1. Assets = Liabilities + Equity
2. Revenue – Expenses = Profit
3. Assets – Liabilities = Equity
4. Income – Expenses = Profit or Loss
5. Cash Flow = Operating Activities + Investing Activities + Financing Activities
6. Accruals – Deferrals = Revenue – Expenses
7. Going Concern
8. Matching Principle
10. Full Disclosure
Why are the golden rules important?
What are some of the specific golden rules?
How can businesses ensure that their financial statements are in compliance with the golden rules?
We hope you enjoyed reading about the golden rules of accounting. These are very basic accounting principles to ensure that you are on the right track. If you need any help with your accounting or bookkeeping, please comment to us. Thank you again for reading, we are always excited when one of our posts is able to provide useful information on a topic like this!