The “Golden Rules” of accounting, also known as the “Three Golden Rules,” are fundamental principles that govern the process of recording financial transactions in double-entry bookkeeping.
- Debit the Receiver, Credit the Giver:
This rule applies to personal accounts. When you receive something, you debit the account, and when you give something, you credit the account. For example, if you receive cash, you would debit the “Cash” account; if you give
cash, you would credit the “Cash” account.
- Debit what Comes In, Credit what Goes
This rule applies to real accounts, such as asset accounts. When an asset
increases, you debit the account, and when it decreases, you credit the
account. For instance, if you purchase equipment (an asset), you would debit
the “Equipment” account; if you sell equipment, you would credit the
“Equipment” account.
- Debit Expenses and Losses, Credit
Income and Gains: This rule pertains to nominal accounts, including income and expense accounts. When an expense or loss occurs, you debit the account; when you earn income or experience gains, you credit the account. For instance, if you incur an expense like rent, you would debit the “Rent Expense” account; if you earn revenue from sales, you would credit the “Sales Revenue” account.
It’s important to note that each
transaction involves at least two accounts – one account is debited, and
another is credited. This double-entry system ensures that the accounting
equation (Assets = Liabilities + Equity) remains in balance after each
transaction.
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