Golden Rules of Accounting

GOLDEN RULES OF ACCOUNTING

Overview of Accounting:-

Accounting is the process of recording, classifying, summarizing and analysing the financial transaction of a business.

Recording of transactions:-

Business transactions are generally entered in the Double Entry System.

Each accounting transaction is recorded in at least two accounts with a corresponding Debit or Credit entry.

Accounting Cycle:-

1. Financial transaction
2. Journal Entries
3. Ledger posting
4. Trial Balance
5. Financial Statement

Accounting Rules:-

There are two rules of accounting:-

Golden rules of Accounting

Modern rules of Accounting

GOLDEN RULES OF ACCOUNTING

Traditional Rules of accounting are based on types of account:-

REAL ACCOUNT: - DEBIT WHAT COMES IN, CREDIT WHAT GOES OUT

• These are the accounts which contain transactions related to assets and liabilities of the business.
• Assets in this case are divided into tangible and intangible assets.
• Tangible assets are those such as Plant, Building, and Machinery etc.
• Intangible assets are those such as patents, goodwill, copyright etc.

 Let us take examples of the same and see how journal entry is passed for the same:-

Purchase of furniture (asset) by creditor Mr Ram (liability) on credit basis for Rs.5000.

 PERSONAL ACCOUNT:-DEBIT THE RECEIVER, CREDIT THE GIVER.

• These are the accounts which contain the name of the individual or organisation with which our business is entering a transaction with.
• Some examples of personal accounts are customers, vendors, salary of employees etc.

Let us take examples of the same and see how journal entry is passed for the same:-

Employees' salary paid through the bank amounts to Rs. 10000.

 NOMINAL ACCOUNT: - DEBIT THE INCOME AND LOSSES, CREDIT THE INCOME AND GAIN

• These are the accounts which contain the transactions related to income and expenses related to a business.
•  Mainly the accounts in the profit and loss account are shown under this category.
• Some examples of nominal accounts are Administrative expenses, Shipping Charges, Office Rent etc.

Let us take examples of the same and see how journal entry is passed for the same:-

Office rent paid for Rupees 1, 20,000 through a bank account.

Let’s, take example of some transactions and understand their types:-

1. Capital brought in of Rupees 1, 00,000.
2. Rents property worth Rupees 50,000.
3. Bought goods on credit from Mr Ram of Rupees 60,000
4. Sold goods for Rupees 5,000 to Mr Shyam.
5. Cash paid to creditors for Mr Ram Rupees 50,000 
6. Furniture purchased for Rupees 60,000
7. Depreciation charged on furniture Rupees 6,000