The Golden 3 Rules of Accounting 1- Debit The Receiver, Credit The Giver This principle is used in the case of personal accounts. When a person gives something to the organization, it becomes an inflow and therefore the person must be credit in the books of accounts. The converse of this is also true, which is why the receiver needs to be debited. 2-Debit What Comes In, Credit What Goes Out This principle is applied in case of real accounts. Real accounts involve machinery, land and building etc. They have a debit balance by default. Thus when you debit what comes in, you are adding to the existing account balance. This is exactly what needs to be done. Similarly when you credit what goes out, you are reducing the account balance when a tangible asset goes out of the organization. 3-Debit All Expenses And Losses, Credit All Incomes And Gains This rule is applied when the account in question is a nominal account. The capital of the company is a liability. Therefore it has a default credit balance. When you credit all incomes and gains, you increase the capital and by debiting expenses and losses, you decrease the capital. This is exactly what needs to be done for the system to stay in balance. . The golden rules of accounting allow anyone to be a bookkeeper. They only need to understand the types of accounts and then diligently apply the rules. Accounting is referred to as “the language of business” because it communicates the financial condition and performance of a business to interested users. In order to become effective in carrying out the accounting procedure, as well as in communication, there is a widely accepted set of rules, concepts and principles that governs the application of the accounting. These concepts and principles are referred to as the Generally Accepted Accounting Principles or GAAP. In this article, you will learn and familiarize yourself with the accounting principles and concepts relevant in the performance of the accounting procedures. It is a necessity to learn and understand it because you need to apply these concepts and principles during the accounting process. Guidelines on Basic Accounting Principles and Concepts GAAP, is the framework and guidelines of the accounting profession. Its purpose is to standardise the accounting concepts, principles and procedures. Here are the basic accounting principles and concepts: 1. Business Entity A business is considered a separate entity from the owner(s) and should be treated separately. Any personal transactions of its owner should not be recorded in the business accounting book unless the owner’s personal transaction involves adding and/or withdrawing resources from the business. 2. Going Concern It assumes that an entity will continue to operate indefinitely. In this basis, generally, assets are recorded based on their original cost and not on market value. Assets are assumed to be held and used for an indefinite period of time or during its estimated useful life. And that assets are not intended to be sold immediately or liquidated. 3. Monetary Unit The business financial transactions recorded and reported should be in monetary unit, such as US Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or non-monetary information that cannot be measured in a monetary unit are not recorded in the accounting books, but instead, a memorandum will be used. 4. Historical Cost All business resources acquired should be valued and recorded based on the actual cash equivalent or original cost of acquisition, not the prevailing market value or future value. Exception to the rule is when the business is in the process of closure and liquidation. 5. Matching This principle requires that revenue recorded, in a given accounting period, should have an equivalent expense recorded, in order to show the true profit of the business. 6. Accounting Period This principle entails a business to complete the whole accounting process over a specific operating time period. Accounting period may be monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or Fiscal Year. 7. Conservatism This principle states that given two options in the amount of business transactions, the amount recorded should be the lower rather than the higher value. 8. Consistency This principle ensures similar and consistent accounting procedures is used by the business, year after year, unless change is necessary. Consistency allows reliable comparison of the financial information between two accounting periods. 9. Materiality Business transactions that will affect the decision of a user are considered important or material, thus, must be reported properly. This principle states that errors or mistakes in accounting procedures, that which involves immaterial or small amount, may not need attention or correction. 10. Objectivity This principle states that the recorded amount should have some form of impartial supporting evidence or documentation. It also states that recording should be performed with independence, that’s free from bias and prejudice. 11. Accrual This principle requires that revenue should be recorded in the period it is earned, regardless of the time the cash is received. The same is true for expense. Expense should be recognized and recorded at the time it is incurred, regardless of the time that cash is paid. This is to show the true picture of the business financial performance.
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