Three Golden Rules of Accounting: What Are They?
There are certain rules and regulations that are applicable to the process in accounting. These are well-established accounting practices and standards that companies should follow to get the best results from accounting.
Accounting, in simple terms, means to record financial transactions systematically and keep a thorough financial record to ensure the company is upholding the best accounting standards.
Moreover, good accounting can help a business make sound and well informed financial decisions and plan for further expansion.
In this post, we are pleased to discuss the top 3 golden rules of accounting that you must follow in your accounting system to maximize the benefits of implementing efficient and reliable accounting practices.
Importance of Golden Rules of Accounting
The rules for recording financial journal entries are known as the golden rules of accounting. These rules are important to ensure that financial records are created and managed in the best way possible. However, you can only understand the three golden rules of accounting if you are familiar with the three different types of accounts.
These three types of accounts are:
- A personal account is an account that is related to the person or organization. Therefore, any account that is being used by a person or a company is considered to be a personal account,
- A real account refers to the account that represents an asset or if that account has some association with the assets. An asset can be anything owned by a company that has economic value.
- The nominal account is the account that is related to the expenses, losses, incomes, and gains.
Generally, the three golden rules of accounting can be applied to all of these different types of accounts, but their application should be considered separately to extract the maximum benefits of these rules.
Let’s discuss the three golden rules of accounting one by one:
1. Debit the Receiver, Credit the Giver
This principle of accounting is applicable to personal accounts. It simply means that when an individual gives something to the business, it is considered to be an inflow, and hence, the person must be credited in the books of accounts.
Similarly, the receiver also needs to be debited in the accounting books to ensure you have all of the required financial records.
If you are using the services of an accounting firm in Singapore, you will not have to worry about managing these aspects of the business yourself, as professional accountants will maintain thorough financial records.
2. Debit what comes in, credit what goes out
The second major golden rule of accounting is applicable to real accounts. Since the real accounts revolve around assets like building, land, and equipment, they have a debt balance by default. Therefore, when a company is debiting what comes in, it is adding to the current account balance.
Similarly, the company also has to credit what goes out and reduce the account balance when a tangible asset is going out of the business.
Accounting firms in Singapore implement this rule by keeping a close eye on the company’s financial transactions and assets management to ensure all of the new changes are reflected in the updated documents and financial statements.
3. Debit all expenses and losses, credit all incomes and gains
The third and final golden rule of accounting is applicable to a nominal account. This principle makes sure that a company has a default credit balance because the capital of the firm is a liability.
When you are crediting all of the incomes and gains, the company’s capital will increase, and by debiting, expenses and losses will eventually decrease the capital.
When you engage in the service of an accounting firm in Singapore, these professionals will follow the aforementioned rules to ensure the accounting system is maintained properly. Failing to do so can create a variety of financial issues and even lead to major penalties during the company’s audits.
The purpose of having these three golden rules of accounting is to make sure every financial transaction and asset in a company is accounted for. It is important for businesses to ensure the implementation of these accounting principles and standards to ensure maximum financial transparency and accountability.
The good thing is that companies have the option of hiring professional accounting services to ensure the implementation of the best accounting standards and principles.
Companies enjoy a wide range of benefits from professional and certified accountants as they can help in improving payroll services, accounting procedures, and audit functions.
For more information, feel free to get in touch with us.