Saturday, November 2, 2024
Saturday, November 2, 2024

Golden Rules of Accounting and Types of Accounts

by Sachi Chaudhary
Accounting

Accounting is frequently referred to as the business language. Financial data can be recorded, summarised, and communicated in a structured manner with this tool. Whether you’re an entrepreneur, an understudy, or essentially keen on understanding your individual budgets better, learning the basics of bookkeeping is as critical as providing accounting and bookkeeping services. We will go over the various kinds of accounts that are the foundation of this field and the three golden rules of accounting in this blog post.

The Golden Rules of Accounting

Accounting operates on a set of fundamental principles, with the golden rules of accounting serving as its core foundation. These rules dictate how financial transactions are recorded and classified:

The Golden Rule of Debit and Credit: 

The fundamental principle of accounting is this rule. Each exchange includes no less than two records, and for every exchange, there should be an equivalent charge and credit sum. Simply put, it means that there is an equal and opposite reaction for each action (transaction). Credits and debits should always be equal. To recollect this standard, think about the situation: Equity minus liabilities are assets.

  • Debit (Dr): Debits are recorded on the left side of an account and represent increases in assets and expenses or decreases in liabilities and revenue.
  • Credit (Cr): Credits are recorded on the right side of an account and represent either increases or decreases in assets and expenses or liabilities and revenue.

There must be an equal debit and credit for each transaction.

Put another way, the total amount withdrawn from accounts must always be the same as the total amount credited. The accounting equation stays in equilibrium, and the financial statements accurately reflect the company’s financial situation as a result.

On the credit side of the accounting equation, liabilities (such as accounts payable and loans payable) and equity (such as owner’s equity and retained earnings) are recorded. Increases occur when equity or liability accounts are credited.

The Golden Rule of Real Accounts: 

This rule is associated with real accounts, which include tangible assets like buildings, machinery, and vehicles. It states that “debit what comes in, credit what goes out.” When an asset increases, you debit the account, and when it decreases, you credit the account.

  • For instance, if your company purchases a new computer, you would debit the “Computer Equipment” account (a real account) to reflect the increase in assets.

Types of Accounts

These are some examples, and the types of accounts you encounter can vary depending on your personal, financial, and professional needs. Managing and securing these accounts appropriately is essential to protect your personal information and assets. Now that we’ve covered the golden rules of accounting let’s delve into the types of accounts commonly used in accounting:

Asset Accounts: 

These accounts represent items of value owned by a business or individual. Examples include cash, accounts receivable, inventory, and property. Asset accounts are increased with debits and decreased with credits.

Liability Accounts: 

Liability accounts track obligations or debts owed by a business. Common examples include accounts payable, loans payable, and accrued expenses. Liabilities are increased with credits and decreased with debits.

Equity Accounts: 

Equity accounts represent the owner’s interest in a business. They include owner’s equity, common stock, and retained earnings. Equity accounts can be affected by both debits and credits.

Income or Revenue Accounts: 

These accounts record money earned by a business through its primary operations. Examples include sales revenue and service revenue. Income accounts are increased with credits.

Expense Accounts: 

Expense accounts track the costs incurred by a business in its daily operations. Examples include rent, salaries, and utilities. Expenses are increased with debits.

Drawing/Withdrawal Accounts: 

These accounts reflect the owner’s withdrawal of funds from the business for personal use. They are decreased with debits and increased with credits.

Bank Accounts:

  • Savings Account: Used for storing money and earning interest.
  • Checking Account: Used for everyday transactions and paying bills.
  • Certificate of Deposit (CD) Account: Offers higher interest rates for locking in funds for a specific period.
  • Money Market Account: Combines features of a savings and checking account, often with higher interest rates.

Investment Accounts:

  • Trading Account: Utilised for trading stocks, bonds, and different ventures.
  • Account for retirement, such as a 401(k) or IRA: crafted with tax advantages in mind to save for retirement.
  • Account for Education Savings (such as a 529 Plan): used to save money for school costs.

Online Accounts:

  • Email address: Utilised for sending and getting messages.
  • Online Entertainment Record: Utilised for person to person communication (e.g., Facebook, Twitter).
  • Account for Online Shopping: used to make purchases on online stores.

Utility Accounts for golden rules of accounting:

  • Electricity/Gas Account: Used for paying utility bills.
  • Internet/Cable TV Account: Used for accessing internet and cable TV services.
  • Water/Sewer Account: Used for paying water and sewer bills.

Subscription Accounts:

  • Streaming Services Account (e.g., Netflix, Spotify): Used for accessing subscription-based content.
  • Magazine/Newspaper Subscription Account: Used for receiving print or digital publications.
  • Gym Membership Account: Used for access to fitness facilities.

Government Accounts:

  • Social Security Account: Managed by the government for retirement benefits.
  • Tax Account: Used for filing and managing taxes.

Business Accounts:

  • Business Bank Account: Used for managing a company’s finances.
  • Merchant Account: Used by businesses to accept online payments.

Email and Online Services:

  • Email address: For example, Gmail, Yippee Mail, or Viewpoint.
  • Account for cloud storage (like Google Drive or Dropbox): utilised for online file storage.
  • Account for Online Gaming: utilised for online games with multiplayer (such as Xbox Live and Steam).

Social and Professional Networking:

  • LinkedIn: Used for professional networking.
  • Facebook: Used for social networking.
  • Instagram: Used for sharing photos and videos.

Cryptocurrency Accounts:

  • Bitcoin Wallet: Used for storing and managing cryptocurrencies.
  • Cryptocurrency Exchange Account: Used for trading digital currencies.

Membership Accounts:

  • Club Membership Account: Used for accessing club facilities and services.
  • Library Card Account: Used for borrowing books and resources from a library.

Conclusion

Understanding the golden rules of accounting and the different kinds of records is fundamental for anybody managing monetary exchanges, from entrepreneurs to monetary experts. Financial reporting and analysis is built on these rules and account types, allowing individuals and businesses to make sound decisions based on accurate financial data. You’ll be well-equipped to confidently navigate the accounting world if you master these fundamentals.

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