Business

Golden Rules of Accounting

To pass Journal entries systematically, we require certain rules, which are called the Golden Rules of Accounting. Golden Rules of Accounting denotes the required rules that record the day-to-day financial transactions. To understand the Golden Rules of Accounting better, we must have an understanding of types of Accounting. Broadly, there are three major classifications of accounts, i.e. Personal Account, Real Account, and Nominal Account.

Let’s understand the Golden Rules of Accounting with examples:

1. Personal Account: Accounts belonging to persons, Trade Receivables, Trade Payables, etc., are termed personal accounts. Here persons refer to Real persons and Artificial Judicial persons such as companies, Govt. organizations, etc. There are 3 types of Personal Account: Natural Personal Account, Artificial Personal Account, and Representative Personal Account.

Golden Rule: Debit the Receiver, Credit the Giver.

For example, The cash amount received from Mohan is Rs. 5000. Here, you will debit the cash account (receiver), and you will credit Mohan’s account (giver).

2. Real Account: Accounts related to a firm’s assets, properties, and possessions. For example, Machinery Account, Cash in Hand, Investments, Fixed Deposits, etc.

Golden Rule: Debit what comes in, Credit what goes out.

For example, Business commenced with capital Rs. 2,00,000. Here, the cash account will be debited (what comes in), and the capital account will be credited ( what goes out ).

3. Nominal Account: Accounts belonging to expenses, losses, incomes, and gains. For example, Accounts for salary, rent, interest paid, commission receives, etc.

Golden Rule: Debit all expenses and losses, Credit all incomes and gains.

For example, The Dividend received is Rs. 3,00,000. Here, you will debit the Bank account (receiver), and the business will credit the Dividend account (income).

As we have understood the Golden rules of Accounting with examples, let us understand what is debit note and credit note.

What is Debit Note and Credit Note?

A Debit Note and Credit note is used while the return of goods is made between the two businesses.

Debit Note: In case of return of goods, it is the basis of recording an entry in Purchases Return Book or Purchases Journal Book. It is an intimation for debit made in the account of the supplier containing the reason for it. The customer prepares a debit Note on the supplier.

An invoice is a kind of Debit Note.

Situations where a Debit Note is issued to the seller are as follows:

  1. Invoice value correction.
  2. Warranty claims.
  3. Purchase cancellation by buyer.
  4. Incentive received by a buyer from the seller.
  5. Goods returned due to damage or not according to buyer’s specifications.
  6. Correction of discounts, if not applied.
  7. Discount received on early payments.

Credit Note: In case of return of goods, it is the basis of recording an entry in Sales Return Book and Sales Return Journal Book. It is an intimation of credit made in the account of the customer containing the reason for it. The supplier prepares a Credit Note.

Situations when the seller issues a credit note:

  1. Invoice value correction
  2. Incentive given by Seller to Buyer.
  3. If goods returned due to damage or not according to the buyer specifications.
  4. Warranty claims.
  5. Purchase cancellation by buyer.
  6. Correction of discounts, if not applied.
  7. Discount given by seller on early payments.
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