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Accounting

Accounting is the method of keeping track of a company’s financial transactions. Summarizing,  reviewing, and reporting these transactions to oversight bodies, regulators, and tax collecting authorities are all part of the accounting process.

Accounting financial statements are a description process of financial activities over a period that summarises a company’s expenses, financial status, and cash flows.

The Golden Rules of Accounting

Accounting’s Golden Rules are used to document economic transactions in ledgers. These laws are based on three different types of accounts: personal, actual, and nominal. An account is a consolidated record of transactions involving a single individual, item, or category of income and cost.

Dr stands for debit, and Cr stands for credit. The words debit and credit refer to the left and right sides of a coin. They don’t imply an increase or decline in value. Debiting is the process of entering a number from an account’s left hand. Crediting is the process of making an entry on the right side of the page. Accounting’s golden rules are based on the accounts mentioned below, which are divided into three categories:

Account

  • Personal Account
  • Real Account
  • Nominal Account 

Types of Accounts

The golden principles of accounting are applied to all ledger records involved with corporate operations, such as assets, obligations, incomes, gains, costs, and losses. Accounting rules are primarily based on three types of accounts:

  1. Personal Account

Personal accounts are those accounts that are related to all categories of individuals, including natural persons, artificial persons, and elected persons, according to the golden laws of accounting. The below are the three groups of people: –

Natural People – Natural person’s accounts are those that are connected to human beings. Amanpreet, Jazz, Pawan Kumar, Vijay, Amir Khan, and so on.

Invest in elss funds

Artificial People – Artificial persons are accounts that do not have a physical life and are formed by by-laws. Any business account, for example, may be a firm, corporation, bank, or entity.

Representative Persons – Representative persons are certain accounts that represent an individual or a group of people. Outstanding Salary, Prepaid Expenses, Accrued Income, Pre-received Income, and so on are examples.

  1. Real Account

Real accounts are those accounts that are linked to the assets of the company, according to the basic principles of accounting. As a result, this provision applies to the following business activities involving assets accounts: –

  • Purchases/Creation of asset
  • Sales of asset
  • Depreciation charged on the asset
  • Disposal of an assets
  1. Nominal Account

Nominal budgets are those accounts that are applied to both expenses/losses and incomes/gains, according to accounting’s golden principles.

How do the Three three golden Rules Work?

  1. Debit the Receiver, Credit the Giver

In the case of personal accounts, this theory is applied. When someone donates something to the organization, it becomes an inflow, and the individual must be credited in the records. This is also valid in reverse, which is why the recipient must be debited.

  1. Debit What Comes In, Credit What Goes Out

In the case of actual accounts, this theory is extended. Machinery, soil, and buildings, among other things, are included in real records. By nature, they have a negative balance. As a result, the debit that comes in adds to the current account balance. This is precisely what must be achieved. Similarly, when a tangible commodity leaves the company, crediting what goes out reduces the account balance.

  1. Debit All Expenses And Losses, Credit All Incomes And Gains

If the account in question is a nominal account, this maxim applies. The company’s money is a responsibility. As a result, it has a negative credit balance. Capital is increased when all incomes and profits are credited, while capital is decreased when liabilities and deficits are debited. This is precisely what must be achieved in order for the system to remain balanced.

The Golden Rules of Accounting with Examples

Debit and Credit Examples: 

Purchase of furniture for 10,000 in cash.

Accounts Involved Debit/Credit Rule Applied
Furniture A/C 10,000 Real A/C – Dr. what comes in
To Cash A/C 10,000 Real A/C – Cr. what goes out  

Paid 15,000 cash to X Pvt Ltd.

Accounts Involved Debit/Credit Rule Applied
Unreal Pvt Ltd. A/C 15,000 Personal A/C – Dr. the receiver
To Cash A/C 15,000 Real A/C – Cr. what goes out  

Paid Rs. 18,000 from the bank for rent.

Accounts Involved Debit/Credit Rule Applied
Rent A/C 18,000 Nominal A/C – Dr. all expenses
To Bank A/C 18,000 Personal A/C – Cr. the giver  

Goods sold for 5,000 on credit to Mr X.

Accounts Involved Debit/Credit Rule Applied
Mr Unreal A/C 5,000 Personal A/C – Dr. the receiver
To Sales A/C 5,000 Nominal A/C – Cr. all incomes 

Modern Rules of Accounting

Example of Modern Rules of Accounting:

Received cash 3,000 as rent from X Pvt Ltd.

Accounts Involved Debit/Credit Modern Rule Applied
Cash A/C 3,000 Asset A/C – Dr. the increase
To Rent A/C 3,000 Revenue A/C – Cr. the increase  

Rules of Accounting – FAQs

Q1. Why is the receiver debited and the receiver credited?

A golden rule for personal accounts is to debit the recipient and pay the giver. Individual, business, and company accounts are all examples of personal accounts. By debiting the recipient, it is said that the person accepting products on credit will be debited, and the person offering will be paid.

Q2. Which accounting standard is applicable as per Section 133, of the Companies Act, 2013?

According to section 133 of the Companies Act 2013, the central government will prescribe accounting principles based on the recommendations of the ICAI and in consultation with the NFRA.

Q3. What is the 150-Hour Rule?

The 150-hour rule applies to those who are studying for the CPA exam as a prerequisite.

Q4. What are assets?

You may turn the economic value of a business’s resources into currency (e.g., land, equipment, cash, vehicles)

Q5. How to calculate equity?

Subtract your assets from your liabilities.

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