Finance

The Importance of the Golden Rules of Accounting

Accounting is the process of recording financial transactions pertaining to a certain business. The process consists of analysis, summary, and a report of transactions to oversight regulators, agencies and tax collection enterprises. After members of the GST council raised the GST rates, taxation and accountability have gained more importance.

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The history of accounts can be traced all the way to the beginning of civilization, in the Mesopotamia era. The cradle of civilizations in Egypt and Babylon created auditing systems. There are some spoken/unspoken rules in every field which are universally accepted in the domain. In correspondence to that, accounting also has 3 golden rules which must be followed religiously.

The three golden rules of accounts are:

  1. Debit the receiver, credit the giver.
  2. Debit what comes in, credit what goes out.
  3. Debit all expenses and losses, credit all incomes and gains.

All business entities worth more than Rs. 1.5 lakh in the last 3 years of any professional credentials must maintain their accounts adhering to the above rules. If a business or professional with receipts less than Rs. 1.5 lakh they have to maintain books of accounts (ledgers, cash book and journal) which an Accounts Officer can compute the taxable income.

  • If you have a personal account (general ledger account) you must keep golden rule no. 1. All accounts of individuals or companies fall under this type.
  • If you have a real account, golden rule no.2 is applicable. Accounts for liabilities, assets and equities fall under this category.
  • Nominal accounts follow the Golden Rule No. 3. Accounting about revenues, expenses, gains and losses fall under this category.

Role of Accounting in Business

Accounting keeps a track record of each business’ operations. Transparency in business on the basis of its expenditure, cash flow and tax liabilities can be achieved by business accounting. Accounting generates three critical financial statements:

  • Profit and Loss Statement (provides information about the expenditures, savings, turnover, etc.)
  • Balance Sheet (provides information about the financial position of the entity)
  • Cash Flow Statement (provides information about monetary production evaluation of where the business stands financially)

Benefits

The benefits of accounting is as follows –

  1. Accounting and maintenance of various business records are carried out effortlessly and systematically if a business’s accounts are regularly updated.
  2. The preparation and maintenance of business records and transactions help in comparison of one year’s financial results to another.
  3. By adhering to the 3 golden accounting rules, the financial results thus generated are the basis on which many corporate decisions are made.
  4. It is used to make budgets for upcoming projects and plan future investment opportunities for the expansion of the business.

Conclusion

With the help of accounting, it is possible to get a clear picture of the economy and financial situation of one’s country. Accounting is a systematic record of financial information which can be analysed and recorded for later use. Before following the rules, ascertain the type of your account.

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