Bookkeeping is only one aspect of financial accounting. Every transaction in accounting has two entries: debit and credit. It is critical to determine which accounts must be credited and which must be debited. This is the dual entry accounting system.
The golden rules of accounting are three rules that govern financial accounting. These golden standards ensure that financial transactions are recorded in a systematic manner. The golden rules reduce complex bookkeeping procedures to a collection of concepts that are simple to understand, study, and apply.
Accounting's golden rules aid in the documentation of financial transactions in ledgers. These golden guidelines differ depending on the type of account.
Each transaction would have a debit and a credit entry and will be assigned to one of the three types of accounts shown below.
A nominal account is a normal ledger account that records all income, expenses, profits, and losses for a business. It records all transactions for a single fiscal year. The balances are reset to zero and the process can begin again. A nominal account is one that pays interest.
A real account is a normal ledger account that can record all the assets and liabilities. It has both - actual and intangible assets. Tangible assets include furniture, land, buildings, machinery, and so on. Intangible assets, on the other hand, such as goodwill, copyright, patents, and so on.
As real accounts are carried forward to the next fiscal year, they are not closed at the end. In addition, a real account shows on the balance sheet. A form of real account is a furniture account.
A personal account is a general ledger account that pertains to individuals. It can be natural persons - such as humans, or artificial persons, like corporations, firms, associations, and so on. Company A comes as the receiver when it gets funds or credit from another firm or individual. In the event of a personal account, the other business or individual who contributes to it becomes the giver. A personal account is a creditor account.
Following are the golden rules of accounting-
"Debit what comes in - credit what goes out."
This legislation applies to existing accounts. Accurate replicas include furniture, land, buildings, machines, and so on. By default, they have a negative balance. They are debiting what is arriving in order to enhance the balance of the current account.
"Credit the giver and Debit the Receiver."
It is a rule for personal accounts. When someone, genuine or fictitious, contributes to the business, it counts as an inflow, and the giver must be noted in the records. However, the receiver must be acknowledged. Consider purchasing a gift from a gift shop. Your account will be updated to reflect the transaction.
"Credit all income and debit all expenses."
This regulation applies to nominal accounts. A company's capital is its obligation. It has a credit balance. If all earnings and profits are credited, the capital will increase. When losses and costs are deducted, the capital declines.
Maintaining financial transaction accounts in accordance with accounting's golden standards provides some benefits.
Any firm with receipts of more than Rs. 1.5 lakhs in the three years before an established profession must keep a record of the financial transactions in accordance with accounting's golden principles.
Based on the Rule 6F of the Income Tax Act - the following professions must keep financial records-
A professional is not required to keep books of accounts under section 44AA of the Income Tax Act if his or her professional receipts do not exceed Rs. 1,50,000 in any of the previous three years. In such a case, the professional must keep books of accounts that an Accounts Officer can use to calculate taxable income.
The essential accounting principles are as follows-
A firm is considered to exist in perpetuity. The only way to cease it once it has established itself is to split it. As a result, accountants make use of the concept of a going concern.
This assumption suggests that the company will continue as usual until the conclusion of the next accounting period and that there is no contradictory information. Since the going concern principle, businesses can operate on credit, account for future receivables and payables, and charge depreciation if the machine would be used for a long time.
If management knows that activities will be suspended soon, standard accounting will be discontinued. For dissolution purposes, a special type of accounting is used.
Accounting, unlike trading, cannot account for items in the same way because all values must be documented in terms of a single monetary unit. Because products and items are essentially subjective, assigning valuations to them becomes problematic. Accounting, on the other hand, has regulations in place to address the problem.
The cost idea is inextricably linked with the conservative philosophy. Businesses should reflect all costs on their financial statements according to the cost principle. Land, houses, gold, and other commodities generally appreciate in value. However, the accountants will not allow this appreciation to appear on the company's financial records until it has been realized.
Accountants believe that the market worth of something is merely a subjective judgment. There are so many different points of view that accountants cannot account for them all. It is true since something was purchased and the selling price was verified. As a result, accounting is built on the cost principle and facts.
Accountants are expected to be cautious by nature. They want to hope for the best while preparing for the worse. This is evident in the standards they have set for their profession. Conservatism is an important concept in accounting.
When the number of expected inflow number flows is unpredictable, the organization must identify the lowest possible revenue and the most significant potential expenses using this approach.