The "golden rules" often refer to the fundamental principles of accounting, which provide a framework for recording financial transactions. Here are the three basic rules, derived from the reference:
The Three Golden Rules of Accounting
These rules are used to determine whether to debit or credit an account, which is crucial for maintaining accurate financial records.
| Rule | Explanation | Example |
|---|---|---|
| 1. Debit what comes in - credit what goes out | This rule applies to real accounts, such as assets. If a business acquires an asset, debit that account. If an asset is sold or removed, credit that account. | When a business purchases new equipment (asset), you debit the equipment account and credit the cash account if paid in cash. |
| 2. Credit the giver and Debit the Receiver | This rule applies to personal accounts, which relate to individuals or organizations. When someone gives, they are credited. When someone receives, they are debited. | If a company receives a loan from a bank (the giver), the bank's account is credited, and the company's cash account (the receiver) is debited. |
| 3. Credit all income and debit all expenses | This rule applies to nominal accounts, which include income, expenses, gains, and losses. All income and gains are credited, while all expenses and losses are debited. | When a business makes a sale, the sales revenue (income) account is credited, and if it has incurred salary expense that month, the salary account will be debited. |
Understanding the Debit and Credit
- Debit: An entry on the left side of an accounting ledger. Debits increase asset, expense, and dividend accounts while decreasing liability, equity, and revenue accounts.
- Credit: An entry on the right side of an accounting ledger. Credits increase liability, equity, and revenue accounts while decreasing asset, expense, and dividend accounts.
How to Apply the Golden Rules:
- Identify the Accounts: Determine which accounts are impacted by the transaction.
- Classify the Accounts: Categorize the accounts as real, personal, or nominal.
- Apply the Rule: Use the corresponding golden rule to determine which account should be debited and which should be credited.
- Record the Transaction: Enter the debit and credit entries into the appropriate accounting journal.
Practical Insights
- These rules are the foundation for the double-entry accounting system, ensuring that every transaction has at least one debit and one credit, maintaining the accounting equation (Assets = Liabilities + Equity).
- Mastering these rules is essential for accurate financial record-keeping.
- The golden rules form the basis of all financial accounting and reporting.
