Vakilsearch: Accounting for the Golden Rules
Accounting is a complex business and goes far beyond mere bookkeeping . The crux of the matter comes down to, unequivocally, two important aspects of accounting: debit and credit. A transaction cannot be meaningfully recorded without a clear understanding of what account should be debited or credited.
When a financial transaction takes place, it affects two accounts and, in the dual entry system of accounting, we have two columns for entering our transaction: the debit side and the credit side. How we record the figures in those columns now depends very much on the type of account/s we are dealing with. There are three categories of accounting in the golden rules:
Real account: These are the tangible aspects of the business, such as equipment, cash, furniture, and so on. If an item on this account is coming into a business, it’s recorded on the debit side of the ledger and if it’s going out of the business it’s written on the credit side.
Nominal account: These represent all the expenses, losses, income, and gains incurred while doing business, such as electricity bills, interest earned, running expenses, and so on. Under this category, all expenses and losses are recorded on the debit side of the ledger, and all incomes and gains are recorded on the credit side of the ledger.
Personal account: These represent general ledger accounts connected to legal entities, i.e., individuals or registered organisations. An employee’s salary account, vendor accounts, and creditor accounts are some types of personal accounts. Under this category, transactions where money is received from the business are recorded on the debit side of the ledger and transactions where money is paid into the business are recorded on the credit side of the ledger.
In a nutshell, then, when it comes to accounting, the golden rules are as tabulated as below:
| Ledger Column | Real Accounts | Nominal Accounts | Personal Accounts |
|---|---|---|---|
| Debit | What comes in | Expenses & losses | The receiver |
| Credit | What goes out | Income & profits | The giver |
Why Your Accounting Solution is Pivotal to Your Success?
A solid accounting system in place allows an organisation to plan an effective budget and budgeting policy while controlling expenditure to boost income; monitor the performance of the business more accurately; manage cash flow; possess more complete data snapshots of the company’s performance; and, ensure the legal and regulatory compliance of the company.
The system of debits and credits is at the very basis of this double-entry system of bookkeeping. While it is the best system we have, it does tend to be difficult to implement. Understanding the system of debits and credits may require a few expensive resources. However, even at the best of times, few companies can afford the price of the vast investment required for effective record keeping. It is generally done by clerical staff and people who work in the stores department; and it is generally done inadequately, leading to all sorts of juggling retroactively, and frequently leading to losses.
In the ever-changing business landscape, what you need is a reliable and dependable team of specialists to whom you can outsource all your accounting and book keeping. At Vakilsearch, certified auditors and accounting professionals, and payroll specialists will assist in a broad spectrum of financial services that cover:
Basic financial consultations:
We have expert chartered accountants and financial professionals to whom you can freely address all queries and from whom you can reliably expect the most comprehensive solutions and answers.
Book keeping:
Our book keeping methodology firmly follows accounting’s golden rules, recording financial transactions and information on a daily basis. Our services may include payments made to suppliers, loan payments, customer invoice payments, monitoring asset depreciation, and generating financial reports.
Financial and monthly reports:
A company’s financial health is always the major concern of its creditors and investors. Financial statements serve as an effective methodology to gauge the profitability and safety of their investment, as well as providing critical insights into a company’s financial position and provide an overview of assets and liabilities and stockholders’ equity. It also helps comprehend the company’s revenues and expenditure, how the company pays its debts, and how it services its operational expenses.
Designing of invoices:
Invoices are how companies maintain the records of their sales transactions. They contain details such as the number of items, item descriptions, total sale price and selling price per item, terms of the sales, buyer’s and seller’s information, amounts due, invoice numbers, methods of payment, and the payment due dates. Invoices establish the legal rights of companies with their customers in their transactions.
Expert taxation advice:
At Vakilsearch, our taxation experts offer the best-in-class tax planning strategies that are suitable for your business structure. We understand the changing tax regimes in India and offer timely information and best practices for you to implement.
What are the Golden Rules of Accounting?
The golden rules of accounting are a set of three fundamental principles that guide the recording of financial transactions. They are:
- Debit the receiver and credit the giver. This rule applies to personal accounts, which are accounts that represent individuals or organizations. When someone receives something, their account is debited. When someone gives something, their account is credited.
- Debit what comes in and credit what goes out. This rule applies to real accounts, which are accounts that represent assets and liabilities. When an asset comes into the business, it is debited. When an asset goes out of the business, it is credited. When a liability comes into the business, it is credited. When a liability goes out of the business, it is debited.
- Debit expenses and losses, credit income and gains. This rule applies to nominal accounts, which are accounts that represent revenue and expenses. When an expense is incurred, it is debited. When an income is earned, it is credited. When a loss is incurred, it is debited. When a gain is earned, it is credited.
Benefits of the Golden Rules of Accounting
The golden rules of accounting offer a number of benefits, including:
- Accuracy: The golden rules help to ensure that financial transactions are recorded accurately. This is important because accurate financial records are essential for making sound business decisions.
- Consistency: The golden rules also promote consistency in the recording of financial transactions. This is important because it makes it easier to compare financial statements over time and to compare financial statements of different businesses.
- Transparency: The golden rules help to make financial statements more transparent and easier to understand. This is important for both internal and external users of financial statements.
Types of accounts
There are three main types of accounts in accounting:
- Personal accounts: Personal accounts represent individuals or organizations. Examples of personal accounts include accounts payable, accounts receivable, and owner's capital.
- Real accounts: Real accounts represent assets and liabilities. Examples of real accounts include cash, inventory, and equipment.
- Nominal accounts: Nominal accounts represent revenue and expenses. Examples of nominal accounts include sales revenue, interest expense, and rent expense.
Advantages of Online Accounting
Always Available
Our services are offered on the cloud, bookkeeping which means that you'll have 24x7 access to your accounts and can be sure of confidentiality.
Equity Eligibility
If you're going to raise funding or ask for a loan at a later stage, you would need to provide your books of accounts from the start of operations. The proper record of transactions helps you reduce your compliance.
Review Efficiency
All businesses make decisions based on financial data as they provide an unbiased account bookkeeping of the efficiency of the business. In their absence, it is always possible for bias to creep into decision-making.
Why Vakilsearch
Vakilsearch is India’s largest professional platform of lawyers, chartered accountants, and company secretaries-with years of experience behind. We execute legal work for over 1000 companies and LLPs every month, by leveraging our tech capabilities, and the expertise of our team of legal professionals.
9.1 Customer Score
We make your interaction with the government as smooth as possible by doing all the paperwork for you. We will also give you absolute clarity on the process to set realistic expectations.
300-Strong Team
With a team of over 300 experienced business advisors and legal professionals, you are just a phone call away from the best in legal services.
Access To Experts
We provide access to reliable professionals and coordinate with them to fulfil all your legal requirements. You can also track the progress on our online platform, at all times.
Realistic Expectations
By handling all the paperwork, we ensure a seamless interactive process with the government. We provide clarity on the incorporation process to set realistic expectations.
FAQs on Vakilsearch: Accounting for the Golden Rules
When financial transactions are recorded accurately and consistently, it makes it easier to track the financial performance of a business and to make informed business decisions. Additionally, accurate and consistent financial records are essential for compliance with tax laws and other regulations.
This means that when an expense is incurred, it is debited to a nominal account. When an income is earned, it is credited to a nominal account. When a loss is incurred, it is debited to a nominal account. When a gain is earned, it is credited to a nominal account.
For example, if a company purchases inventory on credit, the inventory account (a real account) would be debited and the accounts payable account (a personal account) would be credited. However, if the company sells the inventory at a loss, the loss would be debited to the cost of goods sold account (a nominal account).
