Do you know about the golden rules of accounting? Every UAE business owner should have a basic understanding of accounting rules. Though it might appear complex at first, understanding the basics doesn’t require a degree in accounting. By following a few simple accounting rules, you can make sure your finances are in order and help your business grow. Let’s discuss the golden rules of accounting and how they can benefit entrepreneurs and businesses in Dubai and the UAE.
Accounting is the process of recording, classifying, and summarising financial transactions to provide information that is useful for business decisions. The basics of accounting also include the principle of double-entry bookkeeping, which requires that all financial transactions be recorded in at least two places. Each transaction should have an equal debit and credit entry on either side of the ledger. These practices help to ensure accuracy and consistency throughout a company’s accounting records.
It’s easy for any entrepreneur or business owner to get caught up in the maze of accounting terms. However, the world of accounting can be distilled down to 3 simple accounting principles. These are termed the golden rules of accounting. Let’s look at these rules in detail as well as the types of accounts associated with each one.
The golden rules of accounting are the fundamental principles that accountants use to record all financial statements. These 3 golden rules of accounting form the foundation of accurate bookkeeping. They are sometimes also referred to as the rules of debit and credit or traditional accounting rules. In accounting, each of the 3 golden rules can be applied to 3 different account types.
The 3 golden rules of accounting are:
- Debit what comes in and credit what goes out (real account)
- Debit the recipient and credit the giver (personal account)
- Debit all expenses/losses and credit all incomes/gains (nominal account)
|Real Account||Personal Account||Nominal Account|
|Debit||What Comes In||The Recipient||Expenses and Losses|
|Credit||What Goes Out||The Giver||Incomes and Gains|
- Rule #1 applies to real accounts
- Rule #2 applies to personal accounts
- Rule #3 applies to nominal accounts
To further understand how these rules apply to each type of account, let’s go into more detail on what a real, personal and nominal account entails.
Rule: Debit what comes in, credit what goes out.
When it comes to businesses, this rule says to debit the account where the goods have come in, and credit the accounts used to purchase those goods and services. This golden rule relates to tangible assets and liabilities like dwellings, machinery, equipment and furniture. Intangible items also apply to real accounts. Examples of intangible assets include copyright and product patents.
By default, a real account has a negative balance and debits everything that comes in, adding it to the existing debt amount. Then, when a physical asset leaves the company, the account balance needs to be credited. Another feature of a real account is that it rolls into the following fiscal year.
Rule: Debit the recipient, credit the giver.
This rule applies directly to personal accounts. The receiver (recipient) is the person who receives the goods or service in return for money and the giver is the entity (business) that offers the goods or service. This account is a general ledger account relating to people and corporations and is also sometimes known as a creditor account.
When a natural or artificial entity donates money to a company it’s termed an inflow. In this case, the receiver must be debited, and the company receiving the donation must be credited.
Now, there are three subdivisions of a personal account which are as follows:
An artificial personal account is an account that represents a non-human legal entity. Examples of artificial personal accounts include government entities, medical centres, hospitals, financial institutions, co-ops and companies.
A natural personal account is an account established to represent the operations of a human being. An example of a natural personal account is a bank account (capital, savings accounts etc).
This type of personal account is a bit different, in that it represents the accounts of either natural or artificial entities. This account type houses transactions from either the year prior or the year ahead. For instance, this account can contain data on an employee’s salary from the previous financial year, or paid rent in advance for the upcoming year.
Rule: Debit all expenses and losses, and credit all incomes and gains.
The above rule can be applied to nominal accounts. Nominal accounts are general ledger accounts that categorise a company’s capital as a debt, which is reflected as a credit balance. Any business expenses should be entered into a nominal account as a debit and credited to the account which receives the funds.
As a consequence of this setup in nominal accounts, an increase in capital results from any income that gets credited. The capital amount also decreases when expenses are debited from the nominal account.
These accounts keep tabs on all transactions that occur during one financial year. After this point, the account balance restores to zero and the nominal account rules continue for the following fiscal year. Examples of nominal accounts for businesses include Salary and Rent Accounts as well as Interest Accounts.
According to Rule 6F of the Income Tax Act, the following professions must maintain accurate financial records in their business:
- Consultancy firms
- Health and Medicine
Beyond the fundamental golden rules of accounts, there’s some other common principles that accountants use to help manage company books and maintain accurate financial information. Below are three accounting terms to become more familiar with to gain a greater understanding of accounting jargon.
The matching principle is a rule in accounting that dictates that expenses and revenues should be matched on the company’s financial statements. This means that when a company records an expense, it should also record the corresponding revenue that it generated from that expense. This helps ensure that the company’s financial statements are accurate and provide a true representation of its financial position.
The matching principle: states that income must be matched with the expenses incurred to earn that income.
The conservatism principle in accounting is a principle that dictates that businesses should be conservative when reporting their financial status. Here, businesses should report assets and liabilities at their estimated market value, even if it is lower than the actual value. This principle is meant to protect investors and creditors by ensuring that businesses are not overstating their financial position.
The conservatism principle: assets and liabilities should be recorded at their lowest possible value.
The revenue recognition principle in accounting is the guideline for when to recognise revenue in a company’s financial statements. This principle states that revenue should be recognised when it is earned or realisable. This means that the company must have met all of the conditions required to earn the revenue and that the revenue is actually available to be received.
The revenue recognition principle: income should only be recorded when it is earned, not when it is received.
There are several advantages to keeping accurate, reliable and sound account records, using the golden rules of accounting:
Maintaining accurate documentation of business records is key to any company’s success. Proper accounting practices safeguard against incorrect or unethical recording, which can negatively impact your business and financial future. Keeping an accurate score of all your business transactions in a secure and systematic way will streamline your financial processes.
It stands to reason that if the 3 golden accounting rules are to be applied to all financial operations within the business, transactions will be recorded appropriately. If your accounting is done correctly, financial statements such as profit and loss accounts, trading accounts, and balance sheets can all be prepared quickly.
You can feel confident that your year-on-year analysis of your financial results is an accurate measure of the accounts, profits and losses that pertain to the business. Following the golden rules of accounting means that each year’s results can be compared side-by-side to track and predict growth or provide valuable insights into the business.
This straightforward and systematic method of accounting gives assurance to entrepreneurs and business owners. Business figures can inherently be trusted, as long as the golden rules are employed. Top management uses this reliable financial information to make important corporate decisions to improve efficiency, profitability and success. This may include investment opportunities or support moves into an enterprise-level operation.
Accounting is essential for businesses to stay compliant with regulatory authorities. The three golden accounting rules provide the foundational framework necessary to maintain compliance with industry regulations. Storing your accounting information in a simple, easily accessible way is also helpful during auditing or if a legal request for paperwork has been made.
If you keep your accounts up to date, it will be easier to stay on top of your tax obligations. Failure to consider the legal requirements as far as taxation can be met with lofty penalties from the UAE government, which further affects your business integrity and value.
Making projections into the future becomes easier and more accurate when you adopt the 3 golden accounting rules. This is a natural downstream effect of having an accurate budget and predicted financial outlook that’s trackable over the life of your business. Sound accounting practices create a strong foundation for a prosperous future, especially for UAE businesses looking to expand and scale up.
It’s important that businesses report all assets accurately, ensure that all liabilities are reported properly, and maintain accurate records of financial transactions. In Dubai and the United Arab Emirates, accounting services are useful for businesses for a variety of reasons.
A professional accounting service can ensure your business’s financial operations are taken care of while adhering to any relevant taxation and accounting rules.
Accounting services in Dubai and the UAE provide entrepreneurs and businesses with advice to help them make informed decisions. An accountant can provide important insights into a business’s finances that may otherwise be overlooked internally. This includes aspects of accounting such as cash flow analysis, budgeting, and debt management.
Accounting services can also help entrepreneurs and businesses to better understand the types of accounts they need to open, how to manage them, and how to report their transactions accurately. An accountant can provide knowledge and guidance on different types of accounts, such as current liabilities, investment accounts, and asset accounts. This helps businesses better plan for their future finances.
With an experienced accountant on your side, you can make considered decisions that are in the best interests of both the company and stakeholders. This will help ensure that your financial position is accurately reported, which helps with the future growth of your business.
Outsourcing your accounting may not always be suitable for your business. Fortunately, there are many useful and sophisticated accounting software options for UAE businesses. Check out some of the best accounting software solutions available for small businesses as well as mid-tier and enterprise-level businesses in the UAE and Dubai.
It’s believed that Italian mathematician Fra Luca Pacioli collaborated with Leonardo da Vinci to develop the golden rules of accounting.
A full set of accounts in accounting is a comprehensive listing of all a company’s financial transactions over a specific period of time. This includes assets, liabilities, equity, income, expenses, profit and loss and balance sheet. Having a full set of accounts is essential for making sound business decisions and accurately assessing a company’s financial health.
Ledger books are where businesses keep track of important information to generate financial statements. It’s a documented record of financial transactions, including a list of all assets, liabilities, and equity at a specific point in time.
A cash book is a book in accounting that records all transactions affecting the cash account. This includes deposits and withdrawals of cash, as well as payments made by cheque or credit card. It’s a record of day-to-day cash receipts, reflecting the cash balance at the end of each day or month. The cash book is used to track a company’s liquidity (how much money it has on hand at any given time).
A journal is a day-to-day transaction log that adheres to the double-entry accounting system. In this record, each debit will have a corresponding credit and vice versa.
The accounting cycle is a process where businesses keep track of payments made and received within a specific timeframe. This includes accepting, recording, sorting and crediting these transactions.
The golden rules of accounting are essential for all UAE businesses, regardless of industry or size. These rules provide a consistent framework for understanding and analysing financial data. It also allows employers, companies and business owners to make sound decisions that will help maximise profits and minimise losses.
The golden accounting rules are the basis of any accounting system. Professional accountants operate with these rules at the forefront of their practice. Some advantages of engaging an accountant to oversee your financial operations include proper recognition of revenue, proper classification of expenses, control over financial assets, accurate reporting of liabilities, and strict compliance with taxation laws.
For expert assistance with any aspect of accounting for your business in Dubai, contact Virtuzone today!
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