Top 5 Golden Rules of Accounting

The "Golden Rules" of accounting refer to the basic principles that guide the recording of financial transactions. These rules are the foundation of double-entry bookkeeping, which is a system where every transaction has equal and opposite effects in at least two different accounts.

 

The five Golden rules of Accounting are:

 

1. Debit what comes in, Credit what goes out or Debit the Receiver, Credit the Giver:

   • This rule signifies that when an asset or an expense increases, it is debited. Conversely, when a liability, equity, or revenue increases, it is credited. For example, if cash is received, the cash account is debited; if cash is paid, the cash account is credited.

2. Debit the Receiver, Credit the Giver or Debit what comes in, Credit what goes out:

   • This rule is often applied to personal accounts. When dealing with individuals or entities, debiting the receiver's account and crediting the giver's account is the general practice. For instance, if a business receives money from a customer, the customer's account is debited; if it pays money to a supplier, the supplier's account is credited.

3. Debit Expenses and Losses, Credit Incomes and Gains:

   • This rule is applied to nominal accounts. Expenses and losses are debited because they decrease the owner's equity, while incomes and gains are credited because they increase the owner's equity. For example, if a business incurs an expense, the expense account is debited; if it earns revenue, the revenue account is credited.

4. Debit the Increase in Assets, Credit the Decrease in Assets:

   • This rule is based on the accounting equation (Assets = Liabilities + Equity). When an asset increases, it is debited, and when it decreases, it is credited. For example, if a company purchases equipment, the equipment account is debited; if it sells equipment, the equipment account is credited.

5. Credit what goes out or Credit the Decrease in Liabilities Debit what comes in or Debit the Decrease in Equity:

   • When a liability or equity decreases, it is credited. For instance, if a company pays off a loan, the loan liability is credited; if it repurchases its own shares, the equity account is debited.

 

 

These golden rules ensure that the accounting equation remains in balance after every transaction and that the fundamental principles of double-entry accounting are followed. It's important to note that these rules are a simplification, and the application may vary based on specific transactions and account types.

 

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