What Are The Golden Rules Of Accounting?

Accounting is certainly worth learning, not just for those who want a career in accounting, but also for business owners and managers who want to be able to understand how well their business is doing financially.

When you’re learning something that’s unfamiliar to you, you have to start with the basics. And when it comes to accounting, there are just 3 must-know golden rules that must never be deterred from.

The 3 golden rules of accounting apply to the dominant means of accounting used by the majority of accountants, bookkeepers, and businesses, known as double-entry bookkeeping. There are very few accounts who do not use this method. It is an excellent means of ensuring accuracy.

The purpose of this article is to not just to state these golden rules of accounting, but to explain each of them in turn. These rules and their explanation alone is not enough to really teach you accounting, but you won’t get very far in accounting if you don’t understand these 3 golden rules.

In order to aid your understanding of these rules, this article will use easy to follow examples. Quite often these golden rules of accounting don’t always make complete sense the first time you hear them, but with any luck, this article will make things clear to you.

And without further ado, let’s get straight to it.

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Golden Rule Number One: Debit The Receiver And Credit The Giver

What this means is that when goods or services are sold, the accountant or bookkeeper must debit the cost of the goods or services from the account of the party who bought the goods or services. Or in other words, deduct the cost from the account balance.

And at the same time, this exact same amount must be credited to the party who sold the goods or service.

For example, if you were to order a laptop from an online retailer for your business, then the cost of the laptop must be deducted from your business account because you are the receiver of the laptop.

Simultaneously, this also means that the same amount must be deducted from the business account of the online retailer, because it is this party that’s the “giver”, selling the laptop to your business, the receiver.

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Golden Rule Number Two: Debit What Comes In And Credit What Goes Out

Golden Rule Number Two refers to double-entry bookkeeping, where entries are made in account ledgers to record changes in the value of business transactions.

What is meant by this rule is that when goods or services are bought, the value of the transaction must be debited or taken from one account, and credited or added to another account.

The issue with this golden rule is that it doesn’t always make sense when you first hear it, since with personal accounts, your account is debited when you pay for something, money going out, and gets credited when money comes in rather than when it goes out. But hopefully, the following example will help you to put in a specific context to help you understand it.

So, let’s carry on with the exact same example that we went through earlier. If your business buys a laptop from an outside source, then this laptop has come at a cost. Therefore, when the laptop comes in, the accountant must debit (deduct) the cost of that laptop from your business’ cash account.

However, at the same time, the laptop has become one of the business’s assets, because it has become the property of the business, thus boosting the worth of the business, and that is why the cost of the laptop should be credited (added) to the business account.

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Golden Rule Number Three: Debit Expenses And Losses, Credit Income And Gains

A business has all kinds of expenses, losses, income, and so on. And all financial and monetary goings-on for the business must be meticulously recorded with utmost care and accuracy.

But one of the most important things to be sure of is just what counts as expenses and what counts as income.

Examples of expenses can include the cost of equipment, employee wages and expenses, lease of premises, utility bills, software subscriptions, and so on.

And of course, the business will also have an income and other gains, such as through the sale of goods and services.

All of the expenses and losses of the business must be deducted (in other words debited) from the business’ accounts, and ultimately from the net worth of the business.

At the same time, on the flip side, any income that comes into the business, whether through sales, donations, or investment, must be added (in other words credited) from the business’ accounts, and ultimately from the net worth of the business.

Then, when the accountant comes to literally balance these double-entry books, everything should tally up correctly, and it then becomes possible for the accountant to produce financial statements that describe in numbers just how well or not well the business is doing at any particular point in time.

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Wrap Up

So, in summary, when bookkeeping and accounting, you must remember the three golden rules: (1) debit the receiver and credit the giver, (2) debit what comes in and credit what goes out, (3) debit expenses and losses, credit income and gains.

In order for the financial statements produced by the account to be able to paint a picture of the financial status of the business, all 3 of these golden rules of accounting must be strictly adhered to.

It only takes one wrong mistake or minor error to throw off the whole thing, and produce inaccurate figures.

I hope that you’ve found these rules and their explanations straightforward and easy to understand, and that it gives you the confidence and motivation to take your study of accounting that bit further.

Accurate bookkeeping and accounting is a valuable skill, and knowing these golden rules will stand you in good stead in any bookkeeping, or understanding of bookkeeping required of you going forward.

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