RULES OF ACCOUNTING

GOLDEN RULES OF ACCOUNTING

Accounting in the US is guided by a set of regulations referred to as the Generally Accepted Accounting Principles (GAAP). These are the rules that every business must follow. They are the rules of accounting. The rules guide every aspect of accounting including transactions, income and records. However, there are three main golden rules of accounting. They apply to all categories of financial transactions. The rules talk about making debit and credit accounting ledger where by all transactions are categorized into real, personal or nominal accounts.

FIRST RULE OF ACCOUNTING IS REAL ACCOUNTS

Real accounts involve aspects of the business that are tangible. For an item to be categorized as real account, it has to be physical such as furniture, office supplies and cash. Real accounts can be equity accounts, liability or asset accounts. They are also called asset accounts. If an item is purchased for the purpose of remaining in the business, the accounting detail should be entered on the debit side of the accounting ledger. On the other hand, items that leave the business are on the credit side of the accounting entries. For instance, if one purchases furniture, the furniture account reflects the amount used on the debit side. The cash account then reflects the same amount on the credit side. At the end of the fiscal year, real accounts are carried over to the next fiscal period. The rule for real account is “debit what comes in, credit what comes out”.

SECOND RULE OF ACCOUNTING IS PERSONAL ACCOUNTS

Personal accounts are general ledgers involving individuals or organizations. When a person or an organization gives something to the organization, it is recorded in the credit side of the ledger. If the organization gives something to someone or a different organization, it is recorded to the debit side of the accounting ledger. If on purchases office supplies worth $2000 from Company A, the purchase account reflects a debit of $2000. Since Company A is the giver, they are credited $2000. Therefore, one credits Company A as the giver and debits the purchase account as the receiver. The rule of personal accounts states “debit the receiver, credit the giver”

WHAT IS THE THIRD RULE OF ACCOUNTING

The third golden rule of accounting is the rule of nominal accounts. Nominal accounts are accounts which are closed at the end of every accounting period. These accounts are also referred to as temporary accounts. Nominal accounts are made up of expense, revenue and loss and gain accounts. A company’s capital is a liability. As such, companies will always have default credit balances. The capital increases as a result of crediting the company’s incomes and gains. When the expenses and losses are debited, the company’s capital decreases. Some of the common nominal accounts include electricity expenses, profit from sales, telephone expense and interest received. An example of expenses or loss in nominal accounts is when one purchases a $400 item from company A. the purchase is debited on the purchase account and credited on the cash account. If the company sells $400, it is credited as income on the Sale account and debited on the cash account. The rule of nominal accounts is “debit all the expenses and losses, credit all the incomes and gains

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