Golden Rules of Accounting - Types and Examples

Personal Account

A general ledger account that is used for individuals is referred to as a personal account. It can be real people, like individuals, or made-up people, like businesses, associations, and so on. When a Company receives money or credit from another company or person, it acts as the receiver. In the case of a personal account, the other company or person who makes a contribution thereto assumes the role of the giver. A creditor account is a personal account. 

Nominal Account

 A nominal account is a general ledger that includes the expenses, incomes, profits, and losses of a business. It includes every transaction that takes place throughout a fiscal year. Additionally, it restarts at zero when the new fiscal year starts. Salary Account, Interest Account, Rent Account, Commission Received are a few examples of nominal account.

Real Account

An ordinary ledger account that can list all the assets and liabilities is a true account. Both tangible and intangible assets are present. Land, furniture, machinery, buildings, and other tangible assets are examples of tangible assets. On the other hand, intangible assets include things like copyright, patents, goodwill, and so forth. Real accounts are not closed at the end since they are carried over to the following fiscal year. The balance sheet also displays an actual account. A furniture account is a type of real account.

Accounting’s Golden Rules

There are certain golden rules pertaining to accounting that you must know. The rules are given below:

1. Credit all income, debit all expenses

Nominal accounts are covered under this rule. Capital is a company's commitment. A credit balance exists. The capital will rise if all the profits and earnings are credited. The capital decreases once losses and expenses are subtracted.

1. Debit what comes in and credit what goes out

This law is applicable to legitimate or real accounts. Furniture, real estate, structures, tools, and other items can all be accurately replicated. They start out with a negative balance. To improve the financial position of the current account, they are debiting what is being received.

1. Credit the giver and debit the receiver

For personal accounts, it is a requirement. Any contribution to the company, real or imagined, counts as an inflow, and the giver must be recorded in books. The receiver must be acknowledged, though. Think about getting a present from a retailer. The transaction will be updated in your account.

What are the Benefits of the Golden Rules of Accounting?

The benefits of the golden rules of accounting are mentioned below:

1. Comparing results of the financial outcomes: The golden rules guarantee accurate recording of financial records. As a result, companies can compare their financial outcomes year over year in a simpler and more effective manner.
2. Computing the valuation of a business: Correct business valuation is aided by a strong accounting process, allowing for increased investment and expansion.

1. Maintaining business records in a proper manner: The correct upkeep of a company's records is crucial to its success. By doing this, the company will guarantee that its records are kept in a secure and organised manner.
2. For processes related to budgeting and future projections: A strong foundation for any organization's growth may be provided by a balanced budget built on ethical accounting procedures. Estimates for the future are more precise when an effective accounting process is in place.
3. Preparation for financial statements: Financial activities will be accurately recorded if the accounting profession's golden guidelines are followed. Financial statements including profit and loss statements, balance sheets, and trading accounts might all be produced quickly if the accounting is done correctly.
4. Helps in matters related to taxes: Government agencies may impose heavy fines because of tax shortages brought on by improper accounting practises, which would be detrimental to reputation and brand value.
5. Helps in complying with regulatory bodies: For organisations that must comply with regulatory agencies, accounting is essential. Without the fundamental foundation established by the accounting rules, regulatory compliance would be challenging to achieve.

1. Helps the Corporate in making decisions: Financial data are reliable and relevant in the senior management's decision-making process thanks to the accounting process based on accounting principles.

Who is supposed to maintain the Account Books?

Any company with revenues of more than Rs.1.5 lakh in the period of three years prior to becoming an established profession is required to maintain financial records in accordance with the fundamentals of accounting.

According to Income Tax Act Rule 6F, the following professions are required to maintain financial records:

1. Engineering

1. Architectural
2. Technical Consultation
3. Accountancy
4. Legal
5. Medical

1. Secretary of a Company
2. Film Artists
3. Authorised Representatives
4. Interior Decorators

If a professional's professional revenues in any of the three preceding years did not exceed Rs. 1,50,000, the professional is not required to maintain books of accounts under section 44AA of the Income Tax Act. The professional is then required to maintain books of accounts that a financial officer can use to determine taxable revenue.

Golden Rules of Accounting’s Fundamentals

The principles of golden rules of accounting are mentioned below: 

Monetary Approach

As a result of the requirement that all values be expressed in terms of an individual monetary unit, accounting, unlike commerce, is unable to account for objects in the same manner. Assigning values to products and items becomes challenging because they are ultimately subjective. Contrarily, accounting has rules in place to deal with the issue.

Conservatism Approach

Accountants are known for having a cautious temperament. While prepared for the worst, they wish to hold out hope for the best. The guidelines they have established for their field make this clear. The idea of conservatism is crucial in accounting. The organisation must use this method to determine the lowest possible revenue and the highest possible potential expenses when the projected quantity of inflows is unknown.

Futuristic Approach

A business is thought to be eternal. Once it has taken hold, the only means to stop it is to separate it. Therefore, the idea of going to business is used by accountants. According to this presumption, the business will carry on as usual until the end of the subsequent accounting period and there are no inconsistencies in the data. Due to the going concern principle, companies are allowed to operate on credit, account for future receivables and payables, and depreciate equipment if it is in use for an extended period. Regular accounting will be stopped if management is aware that operations will soon be stopped. An exclusive kind of accounting is employed for dissolution-related objectives.

Pricing Approach

The conservative philosophy and the cost idea go hand in hand. Regarding the cost principle, businesses should include all costs in their financial accounts. Gold, real estate, and other commodities typically increase in value over time. However, until it has been realised, the accountants will not permit this appreciation to show up on the books of the business. Accountants think that a product's market value is only a personal assessment. Accountants are unable to consider all of the many viewpoints. Since something was bought and its selling price was confirmed, it is accurate. As a result, the cost principle and facts form the foundation of accounting.