The Three Golden Rules of Accounting You Should Always Follow

Alfredo Gaxiola CPA in Houston

It’s no secret that the world of accounting is run by credits and debits. Debits and credits make a book’s world go ‘round.

Before we dive into the golden principles of accounting, you need to brush up on all things debit and credit.

Debits and credits are equal but opposite entries in your accounting books. Credits and debits affect the five core types of accounts:

• Assets: Resources owned by a business which have economic value you can convert into cash (e.g., land, equipment, cash, vehicles)
• Expenses: Costs that occur during business operations (e.g., wages, supplies)
• Liabilities: Amounts owed to another person or business (e.g., accounts payable)
• Equity: Your assets minus your liabilities
• Income and revenue: Cash earned from sales

A debit is an entry made on the left side of an account. Debits increase an asset or expense account or decrease equity, liability, or revenue accounts.

A credit is an entry made on the right side of an account. Credits increase equity, liability, and revenue accounts and decrease asset and expense accounts.

You must record credits and debits for each transaction.

The golden rules of accounting also revolve around debits and credits. Take a look at the three main rules of accounting:

1. Debit the receiver and credit the giver

The rule of debiting the receiver and crediting the giver comes into play with personal accounts. A personal account is a general ledger account pertaining to individuals or organizations.

If you receive something, debit the account. If you give something, credit the account.

2. Debit what comes in and credit what goes out

For real accounts, use the second golden rule. A real account can be an asset account, a liability account, or an equity account.

Real accounts are also referred to as permanent accounts. Real accounts don’t close at year-end. Instead, their balances are carried over to the next accounting period.

With a real account, when something comes into your business (e.g., an asset), debit the account. When something goes out of your business, credit the account.

3. Debit expenses and losses, credit income and gains

The final golden rule of accounting deals with nominal accounts. A nominal account is an account that you close at the end of each accounting period. Nominal accounts are also called temporary accounts. Temporary or nominal accounts include revenue, expense, and gain and loss accounts.

With nominal accounts, debit the account if your business has an expense or loss. Credit the account if your business needs to record income or gain.

Source: patriotsoftware

Alfredo Gaxiola has worked on numerous IRS problem cases and has successfully settled with the IRS to release liens on houses, bank accounts and wages and, if needed, setting a payment installment plan that is not burdensome for the client. He has conducted appeals before the U.S. Tax Court and obtained favorable resolutions in reducing the tax debt of his clients. Mr. Gaxiola served as Treasurer of Camara de Empresarios Latinos, one of the largest and strongest Hispanic organizations in the city of Houston. He has conducted financial and accounting seminars for the Houston Small Business Development Corporation, as well.

Alfredo Gaxiola CPA in Houston

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