Theory of the Golden Rule of Accounting:

The Golden Rule of Accounting is a fundamental principle that forms the

basis for recording financial transactions accurately and consistently. It is
also known as the "Double Entry System" of accounting. According to this
rule, every business transaction has a dual impact on a company's financial
position, and these effects must be recorded in the accounting records.

The Golden Rule of Accounting is based on the following principles:

• Every transaction has two aspects: In accounting, every business

transaction involves at least two accounts. One account is debited, and
the other account is credited. The total value of the debits must be equal
to the total value of the credits for each transaction.

• Debit and credit nature of accounts: The rule establishes the nature of
accounts by defining whether they increase or decrease as a result of a
transaction. The rule states:

• Debit what comes in and credit what goes out: When assets, expenses,
or losses increase, they are debited. On the other hand, when they
decrease, they are credited.

• Credit what comes in and debit what goes out: When liabilities,
revenues, or gains increase, they are credited. When they decrease, they
are debited.

Accounting equation: The Golden Rule of Accounting is directly linked

to the accounting equation, which is Assets = Liabilities + Equity. Each
transaction affects the equality of this equation by maintaining the
balance between total assets and total liabilities and equity.

Application of the Golden Rule of Accounting:

5500 + Batches Imparting knowledge since 1997 85000+Students

To apply the Golden Rule of Accounting, accountants use a system of T-
accounts or accounting software to record the dual impact of every
transaction. When a transaction occurs, it is analyzed to determine which
accounts are affected and whether they should be debited or credited.

✓ For example, when a business purchases inventory for cash, the

following entries are made:

✓ Debit: Inventory (Asset) - to increase the inventory value.

✓ Credit: Cash (Asset) - to decrease the cash value.

5500 + Batches Imparting knowledge since 1997 85000+Students