Golden Rules of Accounting

The Golden Rules of Accounting are foundational principles that guide the recording of financial transactions. These rules are based on the classification of accounts into Personal, Real, and Nominal accounts. Here are the Golden Rules of Accounting:

1. Personal Accounts

Rule: Debit the receiver, Credit the giver.

• Explanation: This rule applies to accounts related to individuals, firms, companies, or other entities.
• Example:
  • When you pay a supplier, the supplier’s account (a personal account) is credited because they are the giver.
  • When you receive cash from a customer, the customer’s account (a personal account) is debited because they are the receiver.

2. Real Accounts

Rule: Debit what comes in, Credit what goes out.

• Explanation: This rule applies to accounts related to assets and properties.
• Example:
  • When you purchase a piece of equipment, the equipment account (a real account) is debited because it is an asset coming into the business.
  • When you sell inventory, the inventory account (a real account) is credited because it is an asset going out of the business.

3. Nominal Accounts

Rule: Debit all expenses and losses, Credit all incomes and gains.

• Explanation: This rule applies to accounts related to expenses, incomes, gains, and losses.
• Example:
  • When you pay rent, the rent expense account (a nominal account) is debited because it is an expense.
  • When you earn revenue from sales, the sales account (a nominal account) is credited because it is an income.

Application of Golden Rules in Tally Prime

To illustrate how these rules are applied in Tally Prime, here are some example transactions and their corresponding entries:

Example Transactions

1. Paying a Supplier

   • Transaction: Paid $500 to Supplier ABC.
   • Accounts: Supplier ABC (Personal Account), Cash (Real Account).
   • Entry:
     • Debit Supplier ABC $500 (Receiver)
     • Credit Cash $500 (Goes out)

2. Purchasing Equipment

   • Transaction: Purchased equipment for $2,000.
   • Accounts: Equipment (Real Account), Cash (Real Account).
   • Entry:
     • Debit Equipment $2,000 (Comes in)
     • Credit Cash $2,000 (Goes out)

3. Receiving Payment from Customer

   • Transaction: Received $1,000 from Customer XYZ.
   • Accounts: Cash (Real Account), Customer XYZ (Personal Account).
   • Entry:
     • Debit Cash $1,000 (Comes in)
     • Credit Customer XYZ $1,000 (Giver)

4. Paying Rent

   • Transaction: Paid $800 as rent.
   • Accounts: Rent Expense (Nominal Account), Cash (Real Account).
   • Entry:
     • Debit Rent Expense $800 (Expense)
     • Credit Cash $800 (Goes out)

5. Earning Sales Revenue

   • Transaction: Made sales worth $3,000.
   • Accounts: Accounts Receivable (Personal Account), Sales (Nominal Account).
   • Entry:
     • Debit Accounts Receivable $3,000 (Receiver)
     • Credit Sales $3,000 (Income)

Creating and Managing Accounts in Tally Prime

1. Creating a Ledger Account:

   • Go to Gateway of Tally: Accounts Info > Ledgers > Create.
   • Enter Details:
     • Name of the Ledger (e.g., Rent Expense, Cash).
     • Under Group (select the appropriate group such as Expenses, Assets, etc.).
   • Save: Press Enter to save the ledger.

2. Entering Transactions Using Vouchers:

   • Sales Voucher:
     • Go to Gateway of Tally > Accounting Vouchers > F8: Sales.
     • Enter the details of the sale transaction.
   • Purchase Voucher:
     • Go to Gateway of Tally > Accounting Vouchers > F9: Purchase.
     • Enter the details of the purchase transaction.
   • Payment Voucher:
     • Go to Gateway of Tally > Accounting Vouchers > F5: Payment.
     • Enter the details of the payment transaction.
   • Receipt Voucher:
     • Go to Gateway of Tally > Accounting Vouchers > F6: Receipt.
     • Enter the details of the receipt transaction.
   • Journal Voucher:
     • Go to Gateway of Tally > Accounting Vouchers > F7: Journal.
     • Enter the details of the adjustment or correction transaction.

Benefits of the Golden Rules

1. Accuracy: Ensures accurate recording of transactions by maintaining a balanced accounting equation.
2. Consistency: Provides a consistent framework for recording transactions.
3. Compliance: Aligns with standard accounting principles and practices, ensuring compliance with regulatory requirements.
4. Simplification: Simplifies the process of understanding and recording financial transactions.

By adhering to the Golden Rules of Accounting, businesses can ensure that their financial records are accurate, consistent, and compliant with standard accounting practices. This foundational knowledge is essential for effective financial management and reporting in Tally Prime.