Golden
rules of accounting preparation of journal
A
Project Paper Submitted in Partial Fulfilment for the Award of the +2 1st
year Commerce department
Submitted
to:
Department of commerce
Higher
Secondary School, Semiliguda
Submitted by:
Name:- ABHI
BHOI
Name of the Institute: Higher Secondary School, Semiliguda
Paper
On: Accountancy
Roll
No: IC21-141
Date of Submission: Signature
SEMILIGUDA J R COLLEGE, SEMILIGUDA
Golden Rules of Accounting
1. Debit the receiver, credit the giver.
2. Debit what comes in, credit what goes out
3. Debit all expenses and losses and credit
all incomes and gains
To
understand these rules, we need to take them individually and in the proper
context. Let’s first understand the role of accounting in a business, to which
it applies, and find out the benefits of good accounting practices that follow
these three golden accounting rules.
Role of Accounting in
Business and its importance:
Accounting
provides clarity in business that helps make the right decisions based on
expenses, tax liabilities and cash flow. There are three critical financial
statements generated through “accounting”.
- A
profit and loss statement gives clarity on the income and expenses.
- A
balance sheet helps to understand the financial position of the business.
- The
cash flow statement helps keep track of cash generated and is used by
investors to assess a business's financial health.
ADVANTAGES
OF ACCOUNTING:
Maintaining the
accounts of financial transactions according to the golden
rules of accounting gives certain advantages.
1.
Maintenance of business records -
The maintenance of business records is critical to the success of a business.
The practice of accounting will make sure that all your business transactions
are recorded in a safe place in the correct order and, more importantly, in a
systematic way.
2.
Preparation of financial statements -
If the golden rules of accounting are applied, then the financial
transactions will be recorded appropriately. Financial statements like profit
and loss account, trading account, balance sheets, can all be prepared quickly
if the accounting is correctly done.
3.
Comparison of financial results -
Accounting done by following the golden rules will make it easy to compare one
year's financial results against another year. Analysis of year-on-year
financial results becomes easier and trustworthy.
4.
Corporate Decision making - An accounting
process based on the three golden accounting rules makes the financial results trustworthy
and valuable in senior management and leadership's decision-making process.
5.
Evidence in Legal matters -
Business matters need to be recorded systematically and filed away in an
organised fashion for quick reference in legal issues.
6.
Regulatory compliance - For businesses,
accounting is of paramount importance in helping compliance with regulatory
authorities. Without the basic foundation laid down by the three golden
accounting rules, it would be difficult to achieve regulatory compliance.
7.
Helps in Taxation matters - Due to
incorrect accounting practices, the shortfall in taxes could attract heavy
penalties from government authorities, negatively impacting image and brand
value.
8.
Valuation of business - A robust accounting
process helps in proper business valuation, helping to get more investment and
expand the business.
9.
Budgeting and Future Projections -
A good budget based on proper accounting practices can be a strong foundation
for any business to be scaled up. Future projections are more accurate with a
robust accounting practice in place.
Who
requires accounting?
Any business with
gross receipts of more than Rs. 1.5 lakhs in the preceding three years of an
existing profession must maintain a record of financial transactions, following
the golden rules of accounting. According to Rule 6F of
the Income Tax Act, the following professions must maintain an account of
financial transactions:
- Medical
- Legal
- Architectural
- Engineering
- Accountancy
- Interior
Decoration
- Technical
Consultation
- Authorised
Representative
- Film
Artists
- Company
Secretary
A professional is
not required to maintain books of accounts as per section 44AA of the Income
Tax Act if the receipts from the profession are not more than Rs. 1,50,000 in
any of the preceding three years. In such a situation, the professional will
have to maintain books of accounts using which an Accounts Officer can compute
the taxable income.
The specified
books, as per rule 6F of the Income Tax Act, are
1.
Cash Book - This book keeps a record of
day-to-day cash receipts and payments, showing cash balance at the end of the
day or month.
2.
Journal - It is a log of day-to-day
transactions where total credits equal total debits following the double-entry
accounting system and using the golden rules for accounting. Each debit will
have a corresponding credit and vice versa.
3.
Ledger - A ledger is a superset of
the journal listing details of all accounts and can be used to prepare various
financial statements.
4.
Photocopied bills or receipts which are more than Rs.25 value.
5.
Original bills of expenses incurred by the business worth more
than Rs.50.
It is required
that all these books should be maintained at the head office of a business.
Books of each year should be kept available for scrutiny for at least 6 years.
If the books mentioned are not maintained as per the rules, a penalty charge of
Rs. 25000 is applicable.
If the
transactions are of international nature, for every missing transaction, 2% of
the value of each will be applicable. Therefore, it is prudent to follow the
prescribed method of maintaining accounting books keeping track of all income
and expenses.
Now let’s get back
to our golden rules of accounting as promised at the beginning of
this article. When taken individually, each of those rules is simple and easy
to understand, but when they are considered together, there is a bit of
difficulty that creeps in. The reason is, each one of the rules applies to a
different type of account.
Let’s try to
understand them one by one.
There are 3 types
of accounts, Personal, Real and Nominal.
Personal
Account:
A personal account
is a general ledger account. All accounts related to persons, whether natural
persons like individuals or artificial persons like companies, fall in this category.
In the case of a
personal account, when a business receives something from another business or
individual, the first business becomes the receiver, and the second business or
individual from which it was received becomes the giver.
Golden Rule 1 says, Debit
the receiver, and credit the giver. Applying the rule to our
example, the books should reflect a debit on the personal account and a credit
on the business account.
Let’s take the
example of buying a gift from a gift shop. In your account, the transaction
will reflect as such.
|
Date
|
Account
|
Debit
|
Credit
|
|
XXXX
|
Purchase Account
|
Rs.5000
|
|
|
Gift Shop
|
|
Rs.5000
|
Real
Account:
In a real account,
the closing balance is retained and carried forward at the end of the year.
These carried forward amounts then become the opening balances for the next
year. These accounts usually pertain to assets, liabilities and equity.
Golden Rule 2
says Debit what comes in, Credit what goes out. In a
real account, if a business receives something of value (property or goods), it
is represented in the books as debited. If something of value goes out from the
business it is represented in the books as credited. An example is given below.
The example below
is of a furniture purchase worth Rs. 10000 in cash.
|
Date
|
Account
|
Debit
|
Credit
|
|
XXXX
|
Furniture Account
|
Rs. 10000
|
|
|
Cash Account
|
|
Rs. 10000
|
Nominal
Account:
A nominal account
is the type of account in which all accounting transactions are stored for one
fiscal year, transferring balances to permanent accounts at the end of a fiscal
year. This allows for resetting the balances to zero and starting afresh.
Nominal accounts are usually related to Revenues, Expenses, Gains and Losses.
Golden Rule 3
says, Debit all expenses and losses, credit all incomes and gains. If
a business incurs a loss or expense, then the books' respective entry is
represented as a debit. If the business earns a profit or gains income by way
of rendering services, then the entry in the book is represented as credit. An
example below demonstrates this. A business pays rent for the premises it holds
and is an expense for the business.
|
Date
|
Account
|
Debit
|
Credit
|
|
XXXX
|
Rent account
|
Rs.12000
|
|
|
Cash Account
|
|
Rs.12000
|
Conclusion:
These three
golden rules of accounting lay the foundation on which the accounting
system is standing today. These rules standardise the representation of
financial transactions across the industry. Before you apply these rules, there
are a couple of guidelines you must keep in mind, which are,
- Check
to ascertain the type of account in the transaction.
- Check
whether the transaction increases or decreases the value of the account.
Keep your accounts
up to date and accurate with these three golden rules of accounting.
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