Bookkeeping and Accounting

3 Golden Rules of Accounting

With the dual entry accounting system, we have two columns to enter our transaction because every financial transaction affects two accounts. One is the debit side, as one may already be aware, and the other is the credit side. Accounts Economic transactions are entered into ledgers according to the Golden Rules. Let’s discuss the significance of accounting and its golden rules in this article.

Why is Accounting Important & Vital?

The process of accounting is really vital in order to run a business. It makes it easier to keep track of income and the expenses, ensures legal compliance, and gives investors, management, and the government access to quantitative financial data that can be used to make decisions.

Role of Accounting in Business & its Importance

Accounting in a company provides transparency that aids in relying on costs, tax liabilities, and cash flow. Through ‘accounting’, three important financial statements are produced. The income and expenses are made clear by a profit and loss statement. Understanding the financial status of the company is made easier by a balance sheet. Investors use the cash flow statement to evaluate the financial health of a company and to keep track of the cash that is generated. Your records produce three important financial statements.

  • Using the financial income statements, you can learn much more about revenue and expenses
  • The balance sheet provides you with a clear view of your company’s financial situation as of a specific date
  • The funds generated and spent over a certain time period are reported on the cash flow statement, which serves as a link between the income statement and balance sheet.

If you want to keep your firm afloat, it is imperative that you maintain accurate and current financial records. Here are a few of the factors supporting its significance for your company, no matter how big or small.

Who Is in Need of Accounting?

Any firm that had gross sales of more than 1.5 lakhs over the previous three years of an active profession was required to keep financial records in accordance with the basic principles of accounting. The following professions are required by Income Tax Act Rule 6F to keep a record of financial transactions:

  • Health and legal services
  • Architecture
  • Engineering
  • Accounting
  • Interior design
  • Technical advice.
  • Company secretary
  • Film artists

Now let’s dive deeper into the Golden Rules!

3 Golden Rules of Accounting:

Rule 1 – Debit the receiver, Credit the giver

Rule 2 – Debit what comes in, Credit what goes out

Rule 3 – Debit all expenses and losses and Credit all incomes & gains

We must consider each rule separately and within its appropriate context in order to comprehend them. Let us first understand the role of accounting in a corporation, which one affects, and the benefits of good accounting procedures that adhere to these following three primary accounting principles.

Each one of those laws is straightforward and easy to comprehend when seen separately, but when they are combined, some complexity surfaces. Because different types of accounts are covered by different restrictions, this is the case.

Individual Account

A general ledger account is a personal account. All accounts relating to people fall under this category, whether they are real people like people or made up people like companies.

When a business receives something from another business or person, in the context of a personal account, the very first business would become the recipient and the second business or person from whom it was received will become the giver.

*Debit the recipient, credit the giver, is the first golden rule.

Real Account

In a real account, the year’s closing balance is held onto and carried forward. The opening balances for the following year are then calculated using these carried-forward funds. These accounts often deal with equity, obligations, and assets.

*Debit what comes in, credit what goes out, according to Golden Rule 2.

Nominal Account

All accounting transactions are kept in a nominal account for one financial year, with balances being transferred to permanent accounts at the end of the financial year. This enables the balances to be reset to zero and a new beginning. The four main categories of nominal accounts include revenues, expenses, gains, and losses.

*Debit all costs and losses, credit all gains, according to Golden Rule 3.


The basis for the accounting system as it exists now is laid out by these three fundamental accounting principles. These regulations harmonise how financial transactions are represented throughout the sector. There are a few principles you must bear in mind when applying these regulations, and they are.

  1. Determine the type of account being used in the transaction by checking.
  2. Verify whether the transaction results in an increase or decrease in the account’s value.

These three golden rules will assist you in keeping accurate and current accounts. If you need to clarify any legal procedures, you can easily contact Vakilsearch, India’s leading legal service provider. Through the experts at Vakilsearch, you can easily complete the paperwork and filings in a hassle-free manner!

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