The “Three Golden Rules of Accounting” are based on the accounting equation that states assets must equal liabilities plus equity.
The three rules are…
1. The Golden Rule of Debit and Credit – For every transaction, there must be at least two accounts involved, and the total debits must equal the total credits. In other words…
- Debit (Dr.) – Entries on the left side of the accounting equation represent increases in assets and expenses, as well as decreases in liabilities and equity.
- Credit (Cr.) – Entries on the right side of the accounting equation represent increases in liabilities and equity, as well as decreases in assets and expenses.
2. The Golden Rule of Assets – Assets increase with debits and decrease with credits. This means that when an asset account is debited, it receives a positive value, such as when cash is received or an asset is purchased. Conversely, when an asset account is credited, it is losing value, such as when cash is paid out or an asset is sold.
3. The Golden Rule of Liabilities and Equity – Liabilities and equity increase with credits and decrease with debits. This means that when a liability or equity account is credited, it is receiving a positive value, such as when a liability is incurred or equity is contributed by owners. Conversely, when a liability or equity account is debited, it is losing value, such as when a liability is paid off or equity is withdrawn.
These three golden rules form the basis of double-entry bookkeeping, ensuring that every financial transaction is recorded accurately and consistently while maintaining the balance of the accounting equation. By following these rules, accountants can maintain the integrity and accuracy of financial records, which are essential for decision-making, financial reporting, and compliance purposes.