The "Golden Rules" of accounting are basic principles that guide how different types of accounts are treated in the accounting process. These rules help maintain the balance of the accounting equation and ensure accurate financial recording. There are three main types of accounts: Personal Accounts, Real Accounts, and Nominal Accounts. Here are the Golden Rules for each type, along with examples:
**1. Personal Accounts:**
- Debit the Receiver
- Credit the Giver
Example: Suppose a business receives a payment of $500 from a customer. In this case, the business would debit the customer's account (as the business is the receiver of cash) and credit the cash account (as cash is given by the customer).
**2. Real Accounts:**
- Debit what Comes In
- Credit what Goes Out
Example: If a business purchases equipment for $1,000, it would debit the equipment account (as equipment comes into the business) and credit the cash account (as cash goes out from the business).
**3. Nominal Accounts:**
- Debit All Expenses and Losses
- Credit All Incomes and Gains
Example: If a business incurs an expense of $200 for advertising, it would debit the advertising expense account (as it's an expense) and credit the cash account (as cash goes out for the expense).
These Golden Rules ensure that every financial transaction is accurately recorded, maintaining the accounting equation: Assets = Liabilities + Equity. The examples provided illustrate how different accounts are affected by the transactions, following the principles of the Golden Rules.
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