The 3 Golden rules of accounting lay the foundation of accounting. But are you also wondering what accounting is and what are the different aspects related to accounting? Then, don’t worry; we will be explaining all the related aspects in this article. So, keep reading.
What is Accounting
The art of identifying, recording, classifying, summarizing, and interpreting monetary transactions in an efficient manner.
What is an Accounting Equation
Assets = Equity + Liabilities
Assets – Liabilities = Equity
What are Assets
Assets are items or resources owned by the company. They can be tangible assets such as office furniture or vehicles, etc. They can be intangible assets such as patents, goodwill, etc.
What’s an Intangible Asset
Assets that cannot be seen or felt.
What’s a Tangible Asset
Assets that can be seen or felt.
What is a Liability
The debts owed by the company.
Examples include rent, taxes, loans, etc.
What are Journal Entries
This is the first step in accounting to record all the business transactions.
Two accounts must be affected and must be equal as well, which includes the debit side and credit side.
What are Ledger Entries
To create financial statements, summarizing the journal entries is necessary, and this is known as a ledger which is also known as a T account.
On the left side is the debit side and on the right side it is the credit side.
It may be used as a single-entry system or double-entry bookkeeping system.
Debit is what comes in, which means what is being bought.
Credit is what goes out, which means what is being spent.
Advantages of Accounting
The business will have several transactions. It helps to record the financial transactions, and if we want, we can even refer to the previous financial years’ transactions to know what were the profits and the losses.
The presence of every business transaction analysis is done in a systematic way.
Business is calculated based on true and fair valuation. The tax authorities would find ease in the settlement of taxation matters.
Sometimes, to expand the business, loans are taken by the business owners.
Sometimes, to expand the business, loans are taken by the business owners.
On the basis of the profitability of the business, financial institutions provide loans which can be measured by looking at the accounts of the company.
If any illegal formalities arise, the recorded business transactions can be used as a piece of evidence in court.
To ensure there are no irregularities in an organization, auditors, based on the accounts of the company, issue audit certificates.
Disadvantages of Accounting
Non-financial transactions cannot be included in the books of accounts.
The information is purely based on estimates.
The information of accounting can be biased as there are different methods to calculate depreciation, the inventory evaluation, capital expenses treatment, etc. varies from different accountants’ influence.
Manipulation of profits is possible. So, the true financial status of the business or the firm or the entity is now shown; window dressing in the balance sheet.
Guarantee of accuracy is not possible, and there is no acknowledgement of market value or real value.
Chartered Accountant is expensive, so it is not possible for a small firm to have a systematic account and proper auditing.
The accounts must be shown to the competitors and the general public, so there is a lack of privacy.
The value of money is not stagnant, and it keeps changing. So, the information recorded in the accounts will not showcase the true economic position of the company.
The accounting standards are not flexible as the Accountant is supposed to practise the guidelines that come under the GAAP standards.
Internal and External users
Internal users are people who use accounting information within the business organization.
For example, includes the Human Resources department requires information on the business profitability in order to set a margin for salaries, incentives, perks, etc.
External users are people who use accounting information outside the business organization. The financial data is being provided to persons outside the company.
Examples include potential investors, finance companies, tax authorities, etc.
What’s Cash A/C
It keeps records of payments that are done by deposits, withdrawals, and cash as well.
What’s Income Account
It keeps an eye on all sources of income of the business.
What’s Expense Account
The business expenditure is recorded.
What Are the Different Types of Accounts
The different types of accounts are:
- Personal account
- Real account
- Nominal account
1. What is a Personal Account
Personal accounts are related to individuals, a firm, or a company. They might comprise natural persons, representative persons, or artificial persons.
Examples include PQRS Trading Company, Manoj, and Shyam Ltd, etc.
One of the 3 Golden Rules of Accounting for a Personal Account
The receiver is debited.
The giver is credited.
Types of a Personal Account (Personal A/c)
- Natural persons
It includes accounts of individuals and natural persons such as Akshay A/c, Pooja A/c, etc.
- Artificial account
It includes accounts of several companies’ institutions such as Akshay Brothers Private Ltd A/c, Lions Club A/c, etc.
- Representative Account
It includes accounts that represent a specific purpose of work such as Prepaid expenses A/c, Outstanding wages A/c, etc.
2. What is a Real Account (Real A/c)
Real accounts are the type of accounts that are related to assets. They represent the properties.
It might exist in physical form or non-physical form.
Types of Real account
- Tangible Real Account
A Tangible Real Account is a type of account where:
- Accounts are physical in nature.
- Assets that are visible to the eyes or can be touched, seen, or felt.
- It includes Building A/c, Machinery A/c, Plant A/c, etc.
- Intangible Real Account
An Intangible Real Account is a type of account where:
- Accounts that are non-physical in nature.
- Assets that are not visible to the eyes or cannot be seen, touched, or felt.
- It can be measured in terms of the amount of money.
- It includes patents, goodwill, etc.
One of the 3 Golden rules of Accounting for a real account
Debit what comes in
Credit what goes out
3. What is a Nominal Account ( Nominal A/c )
These are accounts that relate to gain, loss, income or expenditure. Expense accounts include salary, purchases, electricity bills, etc. Income accounts include sales, the commission received, etc.
Loss accounts include loss on sale of an asset, loss by fire, loss by accident, etc. Profit accounts include profit on the sale of an asset, etc.
One of the 3 Golden rules of Accounting for a nominal a/c
Every type of expenditure and loss which is related to business must be debited.
Every form of income from a business, or if there is any presence of gains, must be credited.
Summary of the 3 Golden rules of Accounting
Debit what comes in the business
Credit what goes out from the business
Debit the receiver
Credit the giver
Debit all of the losses of the business and even the expenses.
Credit all of the incomes of the business and the gains.
Common Example for Understanding 3 Golden Rules of Accounting
Slide Ltd. has the following transactions:
- It deposits Rs. 30,000 into Bank
- It buys goods from Band Ltd. worth Rs. 70,000
- It sells goods to Rubber Ltd. worth Rs. 55,000
- It pays Rs. 32,000 as rent for its premises.
- Interest is earned on a bank account worth Rs. 23,000
For the first transaction, the 3 golden rules of accounting say that Bank A/c and Cash A/c are assets and come under the Real account.
For the second transaction, the 3 golden rules of accounting say that a purchase account is a nominal account, and it is an expense for the business. Band Ltd Account is a creditors account and comes under Nominal account.
For the third transaction, the 3 golden rules of accounting say that a sales account is an income account that comes under a Nominal account. Rubber Ltd. Account is a debtor’s account and comes under Personal a/c.
For the fourth transaction, the 3 golden rules of accounting are mentioned:
- Rent a/c comes under nominal a/c
- Bank a/c is an asset and comes under a Real account.
For the fifth transaction, the 3 golden rules of accounting say that a sales account is an income account that comes under a Nominal account.
Bank A/c is an asset and comes under the real account.