What are the Golden Rules of Accounting?
Accountants are cowboys of information. David Foster Wallace
Accountants gain much respect as they are usually people who have been successfully trained in accounting. A chartered accountant, however, holds a much more reputable title as he or she would have probably sat for his or her board examination. The role of the accountant is so important since it is the accountant who is responsible for maintaining and monitoring financial records.
To find out more information about the basics of accounting, read the article that provides an Introduction to Accounting.
Since accountants play a vital role in all aspects of the business, there are some golden rules that the accountants themselves need to adhere to when they perform their day-to-day activities like read and interpret business records so that these records can be used for communication purposes and for making other business decisions.
First and foremost, you must remember that any person who plays the role of an accountant will need to comply entirely with all government regulations and accounting principles.
Accountants, mainly those who have completed their FASE RE1 and RE5 exams are given the rights to provide financial and professional advice to individual clients. In retrospect, part of the golden rules that every accountant needs to follow is to offer truthful unbiased, and accurate information.
Quite obviously, there are set principles and standards that all accountants ought to follow. Before we explore some of the principles of accounting, consider what is accounting in business.
Principles of Accounting
"Creativity is great but not in accounting." Charles Scott
While you are encouraged to be daring or creative in many other fields of work, the same doesn't apply to the accountancy field. When it comes to accounting, there are general principles, rules, or guidelines that govern what an accountant can or can't do in his or her particular role.
Having standardized principles that accountants must use makes a world of difference, so that each accountant reacts in a professional manner paying very high attention to detail.
In terms of professionalism, accountants who adopt the Generally Acceptable Accounting Principles (GAAP), report information of a high quality.
Again, to ensure that company records are complete and consistent, these accounting principles play a major role. If you thought that accountants just had to be great with numbers, you thought wrong. Accountants need to be well-versed with the accounting principles and they must be willing to put these accounting principles and accounting procedures into practice. It is inevitably the accounting principles that protect accountants from getting involved in any illegal activity or miscommunicating information. It also ensures that the financial information received from accountants is unbiased and truthful.
Again, the same principles apply to the accounting programs and software that you need to use. Whether you are using Sage or Microsoft Office Excel, you need to consider accounting principles.
Take exceptional accounting classes in South-Africa with reputable tutors on Superprof.
Understanding Accounting Principles
Since you are aware that there are some accounting principles that accountants need to follow when performing their daily tasks, there are a few core principles that are taught to aspiring accountants when they are studying to become an accountant.
Here are three of the most important principles that you ought to consider:
Core cost Principle
The reason why you spend most of your school years studying financial statements is because every cost needs to be documented on the respective financial statements.
Accountants need to calculate the cost incurred in every situation and the calculations need to be fair and accurate. There is no such thing as guesswork or opinions when it comes to accounting.
Accounting is based on facts and calculations, never on opinions or guesses.
Full unbiased communication
One of the core accounting principles is that accountants ought to report all their forecasts, predictions and information that was observed in financial records and statements. It is an accountant's duty to communicate the state of a business in a clear and unbiased way.
Time period principle
Every business does need to report the results of its operations over a standard period of time, in order to create a standard set of comparable periods that will become useful for observing and analysing trends in the data.
Read this article to take a look at the principle accounting institutes.
Accounting Rules that Accountants Must Know
As an accountant there are a few rules that you ought to remember, such as:
- Debit the Receiver, Credit the Giver
We apply the debit the receiver principle for personal accounts. When a person gives something to the organization, it is considered an inflow and therefore the person must be credit in the books of accounts. - Debit What Comes In, Credit What Goes Out
We apply this principle to 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. - Debit All Expenses And Losses, Credit All Incomes And Gains
This is one of the basic rules of all nominal accounts. 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 Rules of Debit and Credit
Before we get to the final golden rule in accounting, you ought to understand that you can only be considered an accountant if you are well-versed with the different kinds of accounts. You must also know which accounts to apply which rules to.
Many accountants choose to pursue careers as accountants where they are self-employed and starting out their own accounting firm. Needless to say, even when you choose to go rogue and do bookkeeping on your own, the same rules that you would adhere to when working at an accounting firm applies.
We say that every accountant understands the system of debit and credit the minute that he or she steps out of university and into the world of accounting.
In fact, the rule of debit and credit is such that you ought to remember for every debit, there is a credit. This is a fundamental rule of bookkeeping. Sounds impossible, right?
The double rule of bookkeeping as we call it states that for every debit entry, there must be a corresponding credit entry. The justification for this rule is that accounting is a field that attempts to record all of the effects of an accounting transaction and that too on the correct financial statements.
Start taking bookkeeping courses online on Superprof.
Knowing your debits and credits is essential as debits and credits are recorded in the General Ledger which deals with money flowing in and out of a business.
You may be dumbfounded at the thought that for every debit, there must be a credit. Well, bookkeeping rules are something that you should aim to master from your days of studying Economic Management Sciences (EMS) at a school level.
To be total honest, accounting is quite an easy subject if you know accounting rules as well as how to apply these rules in practical situations. You also need to remember to record each transaction that affects each one of your accounts in business. This yet again brings us to the discussion of what the 5 accounts are:
- Asset accounts
- Liability accounts
- Revenue accounts
- Expense accounts
- Equity accounts
Now that you know what your 5 main accounts are, consider understanding the rules of debit and credit even further. Well, debits increase assets, and it is the credits that decrease assets.
From the bank's point of view, the businesses account is not really an asset, but rather a liability. While bank may look like a funny account in your general ledger, the bank debiting your account is the bank's way of decreasing their liabilities. When the bank credits your account, its the bank's way of increasing their liabilities.
Thankfully, sophisticated software does much of the guesswork for you in terms of what to debit and what to credit, but as an aspiring accounting, you still need to understand what is what.
We urge you that if you are struggling with accounting lessons while you are still at school to reach out to one of our fabulous Superprof tutors. Count only your credits if you go down the route of getting help in the subject from the onset.
If you are struggling with accounting at a university level, there is no reason why you cannot reach out to one of our private Superprof tutors.
Enjoyed this article? Leave a rating!
Loading...
