What are the Golden Rules of Accounting?
There are three golden rules of accounting. They each apply to a different kind of account: nominal, personal and real. The rules outline how debits and credits should be handled in the general ledger for each type of transaction. As a group, they are one of the three generally accepted accounting principles (GAAP) that make up the code of conduct for the American Institute of Certified Public Accountants.
The first golden rule of accounting relates to the management of personal accounts. This group includes not only individuals, but also companies and other organizations. The rule for this group is that the giver should be credited and the receiver should be debited.
Real accounts are covered by the second of the golden rules of accounting. This kind of account concerns assets. They can be tangible assets like equipment or furniture or intangible assets such as copyrights and patents. The rule for this kind of account is to credit what goes out of the account and debit what comes in.
Nominal accounts are covered by the third golden rule of accounting. These accounts cover temporary income and expenses such as sales and purchases. The rule for this kind of account is to credit gains, or income, and debit losses, or expenses.
As a part of the third of the generally accepted accounting principles, the three golden rules of accounting help to clarify the details of how to manage general ledger entries for transactions. The rules emphasize the importance of not only recording all transactions, but categorizing them properly. By entering information in the correct place and way, accounts will be accurate and easier to understand in the future. The records will also be more useful tools for research and long-term assessments.
The other two generally accepted accounting principles are, first, that it is necessary to record each transaction and, second, that double-entry is the preferred method of recording transactions. Rule number one emphasizes that it is not acceptable to miss entering a transaction, whether intentionally or unintentionally. The second rule states the importance of entering information for both sides of a transaction: what is lost and what is gained.
Overall, the three general rules of accounting and the GAAP provide clarity and guidance as to how to handle the two most important concepts in accounting: debits and credits. A credit is any kind of an asset, while a debit is anything that is removed from the asset column. For example, when an individual buys a pencil, that purchase increases the value of owned items in the asset column while it also removes monetary assets from the account. The three golden rules of accounting are, in essence, a further articulation of that overarching concept.
Discuss this Article
Post your comments