The golden rules of accounts govern the profits and losses in each transaction. There are three rules in all:
1. Debit the Receiver, Credit the Giver
Considered only for personal accounts, a debit is recorded when a person gives something to the company.
2. Debit what comes in, credit what goes out
Considered only for real accounts, any asset a company purchases is recorded as a debit. Any asset that is given out is recorded as a credit.
3. Debit all expenses and losses, credit all incomes and gains
Considered for nominal accounts, money that is earned through sales is recorded as a credit, and money spent on bills is recorded as debit.
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Analysis of Modern Approach towards the Golden Rules of Accounting
The modern approach towards the process of accounting categorizes 6 different terms:
When there is an increase in your assets, it is termed as a 'debit'. A decrease in your assets is termed as 'credit'. For e.g., purchasing a piece of land is a debit, but selling it would be a credit.
When there is a decrease in your liabilities, a sum of money is debited in your account. When there is an increase in your liabilities, a sum of money is credited to your account.
When it comes to a company's capital, a decrease is marked as a debit whereas an increase would be marked as a credit.
A decrease in the revenue would be a debit for your account. An increase in revenue would be considered as credit.
If your expenditure increases, it will be recorded as a debt whereas a decrease in expenditure would be recorded as a credit.
An increase in withdrawal would be marked as a debit in your account whereas, a decrease in withdrawal is considered as a credit.
Benefits of Golden Rules of Accounting
Permanent Record of Transactions
Maintaining an account will make all your business transactions permanent. If your account is regularly updated, the accounting and maintenance of all records are carried out seamlessly.
Analysis of Profits and Losses
It is necessary to keep track of all the profits and losses incurred by a company for each quarter.
The maintenance of such records makes the financial position and credibility of a certain company clear.
Accounting aids in planning expenditures of a company possible and curtailing unnecessary expenses in the future.
Managing the Business
It is possible to manage a company's business by foreshadowing the income and expenses by studying its accounts.
You can easily compare your company's performance to that of other companies for any quarter and make decisions based on that information.
The Golden Rules of Accounting enable you to understand the practical and theoretical meaning of debiting and crediting different accounts types. It is absolutely necessary to look for these guidelines and keep the golden rules of accounts in mind before managing your transactions. Furthermore, you can click here to know more about the format of banker's verification letter.