The golden rules of accounting apply to the types of accounts related to a financial transaction. There are three golden rules of accounting, which we shall learn about in this blog. But let us first understand more about accounting.
Accounting has been around since time immemorial and can be traced back to Mesopotamian civilizations. The father of accounting, Luca Pacioli, was the first person to talk about Double-Entry bookkeeping, a practice still in use today. The modern profession of chartered accountancy originated in Scotland in the nineteenth century. Accounting, according to Wikipedia,” is the measurement, processing, and communication of financial and non-financial information about economic entities, such as businesses and corporations”.
That, in simple terms, translates to the recording of financial transactions systematically to keep a record of the transactions. It also requires keeping the accounts updated with the most current transaction updated, reflecting an accurate picture of an institution’s current financial condition.
Golden Rules of Accounting
- Debit the receiver, credit the giver.
- Debit what comes in, credit what goes out
- Debit all expenses and losses and credit all incomes and gains
To understand these rules, we need to take them individually and in the proper context. Let’s first understand the role of accounting in a business, to whom it applies, and find out the benefits of good accounting practices that follow these three golden accounting rules.
All transactions of an entity must be accounted for. To account for these transactions the entity must pass journal entries which will then summarise into ledgers. The journal entries are passed based on the Golden Rules of accounting. To apply these rules one must first ascertain the type of account and then apply the rules.