All stakeholders in an economic entity must be given access to its financial data.  The financials must have accurate information that accurately depicts the organization. Accounting must be consistent since economic entities are compared to determine their financial situation. There are three Golden Rules of Accounting that must be followed in order to create consistency and accurately record the transactions.

Therefore, it is crucial to understand the three accounting golden standards, which make the difficult process of documenting financial transactions easier. The three golden rules of accounting have been attempted to be explained in this article.

What is Golden Rules of Accounting?

• The golden rules of accounting are a set of principles that accountants can adhere to in order to record financial transactions in an organized way. They centre on the dual entry method, which includes credit and debit. You must always be aware of which account should be credit and which one should be debit.
• These rules will assist in determining which accounts are to be credited and which should be debited. The accounting golden rules are a collection of guidelines that make it possible to make sense of the intricate bookkeeping regulations.
• These rules need you to identify the type of account for every transaction. Every account type now has a unique set of rules that must be followed in each and every transaction.

What are the Types of Account?

Nominal Account:

• It is a standard ledger account that documents all of a company’s earnings, outlays, gains, and losses. For one fiscal year, it keeps track of every transaction. The process can begin again once the balances have been reset to zero. An interest-paying account is called a nominal account.

Real Account:

• All assets and obligations can be recorded in a real account, which is a standard ledger account. There are both tangible and intangible assets. Tangible assets involve land, buildings, equipment, and furniture. Conversely, intangible assets concern patents, goodwill, and copyright. Conversely, intangible assets include things like patents, goodwill, and copyright.
• Real accounts are not closed at the end of the year because they carry over into the new year. Furthermore, a valid account will appear on the balance sheet. One kind of real account is a furniture account.

Personal Account:

• It is a general ledger account which belongs to one single person. Humans are examples of natural persons, while corporations, firms, associations, and other artificial entities are examples of artificial persons.
• A business functions as the receiver when it gets funds or credit from another business or individual. The other business or the individual who is contributing to the personal account is the giver. A creditor account is a personal account.

What are the Three Golden Rules of Accounting?

The three golden rules of accounting are:

Rule 1: “Debit what comes in – credit what goes out.”

• Existing accounts are covered by this law. Land, buildings, machinery, furniture, and other items are all accurate copies. They have a negative balance by default. To improve the current account balance, they are debiting what is coming in.

Rule 2: “Credit the giver and Debit the Receiver.”

• For personal accounts, it is a rule. Contributions to the firm, whether real or imagined, are considered inflows, and the giver needs to be identified in the documentation. But you have to give credit to the recipient. Think about buying a present from a store that sells gifts. Your account will get updated to show the transaction. 

Rule 3: “Credit all income and debit all expenses.”

• This rule is applicable to accounts that are not real. The capital of a business is its primary objective. It has a balance of credit. The capital will rise if all earnings and profits are credited. The capital decreases as expenses and losses are subtracted. 

Benefits of Three Golden Rules of Accounting

• Keeping Business Records Up to Date: Maintaining a company’s records properly is essential to its success. By doing this, the company’s records will be kept in a methodical and secure manner. 
• Comparing the Financial Outcomes: Accurate recording of the financial records is mostly guaranteed by these golden rules. As a result, companies may more easily and effectively compare their financial outcomes from year to year.
• Making a Business Valuation Calculation: A company’s financial statements help with accurate business appraisal when they are calculated correctly. Additionally, it aids in attracting additional investments, which leads to the growth of the company. 
• Aids in Future Planning and Budgeting: A solid budget built on good accounting procedures can serve as a solid basis for a company’s expansion. It also helps with future estimates that are more accurate. 
• Evidence in Court Cases: Businesses must systematically record their financial data for easy access during legal proceedings. In this context, applying the golden rules of accounting is helpful.
• Helps with Matters Pertaining to Taxes: Tax deficits can be prevented by accurately accounting for a company’s financial accounts. Penalties for improper accounting methods are severe. It may also affect the company’s image and brand value. 
• Aids in Adherence to Regulatory Bodies: The most crucial factor in meeting regulatory requirements is accurate accounting. Achieving regulatory compliance will be challenging for any organization without appropriate accounting discipline.

You are aware of which kind of transaction belongs in which particular account now that you have a firm grasp of the fundamentals of accounting. As a result, financial transaction log entries must be relevant and precise.

Conclusion

An entity’s transactions must all be tracked. The entity must submit journal entries in order to account for these transactions, which will subsequently be summarized in ledgers. The Golden Rules of Accounting serve as the exclusive basis for the majority of the journal entries. Prior to applying these criteria, it is necessary to determine the type of account.

Since they lay the foundation for accounting, these are referred to as the Golden Rules of Accounting. They resemble the English alphabet’s letters. One cannot form words and, as a result, cannot use the language if they are not familiar with the letters.  In the same way, without knowledge of the golden rules, one cannot pass journal entries and, as a result, cannot accurately account for the transactions.