What are Modern Rules of Accounting?


American or Modern Rules of Accounting

There are a couple of ways to approach the art of accounting, traditional and modern. Classification of accounts under both traditional and modern rules of accounting is done very differently.

The UK or traditional style of accounting classifies all accounts of a business into 3 main types i.e. Real, Personal & Nominal. On the other hand, American or modern rules of accounting classify all accounts into 6 different types i.e. Asset, Liability, Capital, Revenue, Expense & Drawings.

Traditional or Golden rules of accounting are applied with real, personal, and nominal accounts, however, American or modern rules of accounting are applied with the modern classification of accounts.

 

Classification of Accounts and Modern Rules

The first step is to identify the type of account from either of the 6 categories shown in the below table. Once the account is determined correctly, apply modern rules of accounting to prepare a perfect journal entry.

Type of Accounts Debit Credit
Asset Increase Decrease
Liability Decrease Increase
Capital Decrease Increase
Revenue Decrease Increase
Expense Increase Decrease
Drawings Increase Decrease

 

Tip – Memorize the word (CRADLE) which means “small bed for a baby” in the English language.

C – Capital, R – Revenue, A – Assets, D – Drawings, L – Liability, E – Expense

Another way to look at modern rules of accounting is,

American or Modern Rules of Accounting

 

Example Journal Entries

  • Example I – Purchased furniture for 20,000 in cash, prepare journal entry
Accounts Involved Amount Rule Applied
Furniture A/C 20,000 Asset – Dr. the increase
To Cash A/C 20,000 Asset – Cr. the decrease

 

  • Example II – Received 1,00,000 in bank as a loan, prepare journal entry
Accounts Involved Amount Rule Applied
Bank A/C 1,00,000 Asset – Dr. the increase
To Loan A/C 1,00,000 Liability – Cr. the increase

 

  • Example II – Received 5,00,000 via cheque from Mr Unreal as a trade receivable, prepare journal entry
Accounts Involved Amount Rule Applied
Bank A/C 5,00,000 Asset – Dr. the increase
To Mr Unreal A/C 5,00,000 Revenue – Cr. the increase

 



 

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