What Are The 3 Golden Rules Of Accounting?

Everyone knows that accounting services are a fundamental element of every business. Accounting plays an important role because it helps businesses keep track of their income and expenses. Accounting helps explain how your business works in numbers.

Like in any other profession, accounting has rules that need to be followed and applied. There are three golden rules that every accountant must know and follow. Something to keep in mind is that accounting companies or Certified Public Accountants (CPA) should know about these rules, as well as business owners to ensure their accountant is trustworthy.

Before knowing the three golden rules of accounting, you must know that each rule applies to different accounts in accounting. Now let’s take a look at the rules:

Rule #1: Debit the Receiver, Credit the Giver

The first rule of accounting is implemented in personal accounts. Personal accounts are those used for personal or organizational needs. If you received something, you must debit the account. If you give something, you must credit the account. To understand this rule a little bit better, let's take a look at this example:

Let’s say you paid $150 cash to a catering company for an event. What you must do next is to debit the receiver (the catering company) and credit the giver (your cash account).

Rule #2: Debit What Comes In, Credit What Goes Out

The second rule is implemented in real accounts. Real accounts are associated with the assets or liabilities of a company. In this case, when something comes into your real account, you must debit the account. When something goes out of your real account, you must credit the account. Now, let’s take a look at our example:

Suppose you purchased 2 trucks for $120,000 in cash. You must debit your truck account (what comes in) and credit your cash account (what goes out).

Rule #3: Debit All Expenses and Losses And Credit All Incomes and Gains

The third and final golden rule is implemented in your nominal accounts. Nominal accounts are the accounts connected with income, expenses, profit, and loss. This account is closed at the end of each period because they are temporary. So, you must debit the account if your company has any loss or expense; and you must credit the account if your company needs to report any income or profit.

Let’s take a look at our final example:

If you sell $50,000 worth of goods to a distribution company, you must credit the income in your sales account and debit the expense.

Robert Accounting Follows The Golden Rules

We are an accounting company that implements the three golden rules of accounting effectively and help you apply them to your business or personal finances. From our Certified Public Accountants (CPA) to our Tax Accountants, we all value the trust that our clients have in us. Our accounting services are reliable. Become part of the family!