You’ve probably heard of the Golden Rule, which states that you should treat others the way you want to be treated. But did you know there are golden rules of accounting as well? In truth, there are three accounting golden rules. No, one of them isn’t treating your accounts the way they’d like them to be treated.
Follow the three basic accounting standards if you want to maintain your books up to date and correct.
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Golden Rules of Accounting
It’s no secret that credits and debits rule the accounting world. The world of a book revolves around debits and credits.
You should brush up on all things debit and credit before diving into the golden principles of accounting.
In your accounting books, debits and credits are equal but opposing entries. The five main types of accounts are affected by credits and debits:
1. Assets are a company’s resources that have monetary value and may be converted into cash (e.g., land, equipment, cash, vehicles)
2. Expenses are costs incurred during the course of business operations (e.g., wages, supplies)
3. Amounts due to another person or business are referred to as liabilities (e.g., accounts payable)
4. Your assets minus your obligations equal your equity.
5. Cash earned from sales is referred to as income and revenue.
Debits raise the value of an asset or expense account while decreasing the value of equity, liability, or revenue.
A credit is an entry made on the account’s right side. Credits raise the accounts of equity, liability, and income while decreasing the accounts of assets and expenses.
For each transaction, you must keep track of the credits and debits.
Debits and credits are also important to accounting’s golden standards. Take a look at the three most important accounting rules:
Debit what comes in, Credit what goes out
Debit the Receiver, Credit the giver
Debit all expenses Credit all income
An entity’s transactions must be accounted for. To account for these transactions, the entity must generate journal entries, which are subsequently summed up in ledgers. The journal entries are approved based on the accounting Golden Rules. To apply these rules, determine the type of account first, then follow the guidelines.
These are known as the Golden Rules of Accounting because they establish the foundation for accounting. They’re similar to the letters of the alphabet in English. If one does not know the alphabet, he will be unable to form words and hence will be unable to communicate. Similarly, if one does not understand the golden laws of accounting, he will be unable to pass journal entries and hence will be unable to accurately account for transactions.