The Golden Rules of Accounting: A Small Business Guide

For small business owners, it’s vitally important to keep careful track of what business transactions are made over a period of time. Recording, summarizing, and reporting on these transactions supports business health and allows you to make informed business decisions, which can then further support your business growth and success.

As you begin your financial accounting journey, there are three golden rules of accounting to remember. These rules of thumb can help you better understand double-entry bookkeeping and keep your financial records accurate and reliable.

The Golden Rules of Accounting: How to Debit and Credit Appropriately

Accounting for small businesses can feel daunting. However, the golden rules of accounting help simplify confusing ideas and make them easy to understand — and apply. This ensures that every financial transaction is recorded correctly, painting a clear picture of your business’s financial health.

The basis of the golden rules of accounting is double-entry bookkeeping. This type of bookkeeping ensures every financial transaction is recorded in two locations: debits and credits. This method provides a comprehensive perspective of financial transactions and helps maintain balance among accounting records. Essentially, double-entry bookkeeping helps you keep a balanced equation of assets = liabilities + equity.

As you aim to keep your account records balanced, the golden rules of accounting are designed to help you understand how to debit and credit appropriately. Based on the type of account — real, personal, or nominal — there are different rules to follow.

The Golden Rule for Real Accounts: Debit What Comes In, Credit What Goes Out

Real accounts are accounts related to the assets, liabilities, and equity of a business. They represent the tangible and intangible items that have value and are essential for the operations of the business.

The golden rule of accounting for real accounts is to debit what comes in and credit what goes out. In other words, if you acquire an asset, like a piece of equipment, the equipment account should be debited. If you then sell that asset, the account should be credited. This rule is fundamental in managing your business assets.

The Golden Rule for Personal Accounts: Debit the Receiver, Credit the Giver

Personal accounts are accounts related to entities other than the primary business, such as individuals, companies, and other organizations. These accounts represent people or entities from whom the business is expected to receive money or to whom the business expects to owe money.

For personal accounts, the golden rule of accounting is to debit the receiver and credit the giver. In other words, when someone receives a benefit from the business, they are debited. When the business receives the benefit, the giver’s account is credited. This rule helps track payables and receivables effectively.

The Golden Rule for Nominal Accounts: Debit Expenses and Losses, Credit Income and Gains

Nominal accounts are accounts related to the expenses, losses, income, and gains of a business. These accounts are crucial for determining the profit or loss of a business over a period of time.

The golden rule of accounting for nominal accounts is to debit all expenses and losses, and to credit all incomes and gains. Essentially, when you are decreasing your equity, you should debit. When you are increasing your equity, you should credit. This rule is key in budgeting and financial planning.

Applying the Golden Rules of Accounting to Small Businesses

To start applying the golden rules of accounting, start by categorizing your transactions into real, personal, or nominal accounts based on the rules of thumb above. Once that is done, you can begin crediting — and debiting — the accounts using the appropriate rule.

The key to this process is to understand each transaction so you can correctly classify your accounts. Making a mistake in the type of account can lead to a mistake in the debiting and crediting process, leading to inaccurate financial records and statements.

Debits and Credits Can Be Confusing. Let Us Help.

Are you struggling with your credits and debits? Let KeyLin help. Our team of experts are professionals who know the golden rules of accounting like the backs of their hands. With their expertise in accounting and your expertise in your business, you’ll be well on your way to understanding your debits and credits in no time. For a complimentary first consultation, schedule an appointment today.