Accounting Rules

What are Accounting Rules?

 Golden Rules of Accounting is set of frameworks for recording day to day transactions in the entity books using the double-entry system, wherein each transaction has a debit as well as a credit and involves two accounts for each transaction.

The Top 3 Golden Accounting Rules are:

  1. Debit the “Receiver” and Credit the “Giver” (Personal Accounts)
  2. Debit – What Comes IN and Credit – What Goes OUT (Real Accounts)
  3. Debit – Expenses  and Losses and Credit – Incomes and Gains (Nominal Accounts)

Let us understand each one of them in detail.

Accounting-Rules

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Source: Accounting Rules (wallstreetmojo.com)

Personal Account

We classify Personal Account into three Accounts:

  • Artificial personal account- Accounts which are artificially created by persons like companies, legal bodies, partnership firms, etc
  • Representative Personal Accounts- Which directly or indirectly represents a person, e.g., bank accounts, etc.
  • Natural Personal Accounts-Accounts which are directly related to a person, e.g., Krishna A/c.

Debit the “Receiver”

Credit the “Giver”

Real Account

This Account represents the assets which are Tangible and Intangible.

Debit – What Comes IN

Credit – What Goes OUT

Nominal Account

  • All profits, gains, expenses, and losses come under this Account.

Debit – Expenses  and Losses

Credit – Incomes and Gains

Modern Rules of Accounting

As per Modern rules, each account in a transaction will be either debited or credited based on the six categories of Accounts.

Account TypeAccount DebitedAccount Credited
Capital AccountDecreasesIncreases
Assets AccountIncreasesDecreases
Liability AccountDecreasesIncreases
Revenue AccountDecreasesIncreases
Expense AccountIncreasesDecreases
Withdrawal AccountIncreasesDecreases

Based on the type of account the transaction is recorded, the value increases or decreases as per the above table.

Examples of Accounting Rules

Example #1 – Golden Rules

Let us consider if we purchase machinery with cash. There are two accounts involved in this asset (machinery), a cash account and this come under real accountReal AccountReal accounts do not close their balances at the end of the financial year but retain and carry forward their closing balance from one accounting year to another. In other words, the closing balance of these accounts in one accounting year becomes the opening balance of the succeeding accounting year.read more the journal entry will be based on real account rule as below

Rule – Real Account

Debit – What Comes IN – Machinery (asset)

Credit – What Goes OUT – Cash

Journal Entry

Journal Entries 1

Example #2 – Modern Rules

Consider the same example the Machinery purchased through Bank loan is the Asset, and Bank Loan is a Liability, the journal is passed as per the table:

Modern Rule

Modern Rule 1

Journal Entry

Journal Entries 2

How to Use Accounting Rules?

Benefits

  • They are used to know what accounts are involved and how they should be treated.
  • All entities should use the same rule; hence there will be uniformity and consistency in recording transactions.
  • Financial reports prepared using these rules are comparable and understandable easily.
  • Any error can be easily found if the rules are followed.

Accounting Rules Vs. Accounting Principles

Conclusion

Accounting Rules, by its name, lays the foundation for preparing other financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. Since golden rules are used for recording main journal entries and journals are further recorded in the books. Hence it is imperative to follow the rules to prepare a fair report.

Recommended Articles

This has been a guide to Accounting Rules. Here we discuss three golden accounting rules with examples, how to use it, along with its benefits and differences from accounting principles. You can learn more about financial analysis from the following articles –