The Golden Rules of Accounting – How to Apply Them to Basic Journal Entries Questions
Accounting is an incredibly important practice for businesses and individuals alike. It helps you understand the financial health of a company or individual, as well as monitor and record transactions. To ensure accuracy, it’s essential to follow the golden accounting rules when creating journal entries. This article will explain how to use these rules when answering basic journal entries questions.
What Are The Golden Rules Of Accounting?
When preparing journal entries, the golden rules are essential for maintaining accuracy. They are: 1) Debit the receiver; 2) Credit the giver; 3) Debits must equal credits; 4) Personal accounts are debited; 5) Real accounts are credited; 6) Nominal accounts have both debit and credit sides. These key principles allow users to correctly categorize expenses into their corresponding account groups so that they can be tracked properly over time.
How To Apply The Golden Rules Of Accounting To Basic Journal Entries Questions
Applying the golden accounting rules to any journal entry question is relatively simple but requires consistent practice. Here’s how it works:
Step 1: Identify Your Transaction Type
Before starting your journal entry, it’s important to decide what type of transaction you need to record in your books (e.g. sale, purchase, payment). Once you’ve identified this information, you can proceed to step two.
Step 2: Assign accounts and amounts to debits and credits
Once you’ve determined what type of transaction needs to be recorded, it’s time to assign accounts and amounts to debits and credits based on the golden rules of accounting mentioned above. For example, if a purchase was made with cash, then cash should be debited, while stock should be credited, as cash was given in exchange for goods or services provided by another party – hence the ‘credit the giver’ rule applies here!
Step 3: Record the entry in the correct ledger format
Having allocated accounts and amounts according to their respective debit or credit values, we can now record our journal entry in proper ledger format, consisting of date, description/narrative field, followed by debit-side account name and amount, followed by credit-side account name and amount fields under the same line item/transaction heading, i.e. all required details encapsulated in a single ledger line item!
Step 4: Check that debits are equal to credits
Before finalizing your entry, make sure that debits equal credits – if not, then go back through each step until everything is balanced accordingly (this is where the ‘debits must equal credits’ rule comes into play!). This way we can ensure accuracy before we close our bookkeeping process!
Step 5: Post your entry
Finally, once everything has been checked several times, post your entry to the appropriate ledgers, such as the general ledger or the sales ledger, etc., depending on the type/nature/scope of the transaction originally recorded (which would also fall under the first step above). This last step will help to keep track of all business activity in one place, making life much easier when analyzing past performance at a later stage!
Use these five steps when applying the golden rules of accounting to basic journal entry issues – identify your transaction type; match accounts and amounts to debits and credits; record in the correct ledger format; check debits equal credits; post your entry – to ensure accuracy when recording transactions on your books. By following these accounting best practices, you’ll be able to accurately record the data you need for future analysis, giving you a better insight into your overall financial health or situation at any given time!