Golden Rules of Accounting
Golden Rules of Accounting help in recording financial transactions systematically. They serve as a guide to determine which account to debit and which account to credit under the double entry system of accounting.
In accounting, every financial transaction has a dual effect it impacts at least two accounts. One account is debited, while the other is credited for the same amount, ensuring that the books remain balanced.
The Golden Rules of Accounting provide a clear framework to identify and record these effects correctly. To apply these rules, one must first determine the type of accounts involved in a transaction and then follow the appropriate rule for each type.
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| Golden Rule of Accounting |
Personal Account
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| Personal Account |
Personal Account Rule – Debit the receiver, Credit the giver
Personal accounts relate to individuals, groups of individuals, firms, companies, or institutions. These accounts record transactions involving persons or entities with whom the business has financial dealings.
There are three types of Personal Accounts:
a) Natural Personal Account
These are the accounts of real human beings — individuals who can physically receive or give money.
Examples: Shyam’s Account, Ashok’s Account, Creditor’s Account, Debtor’s Account, Drawings Account, etc.
In simple terms: Natural Personal Accounts are the accounts of human beings.
Example: Received ₹1,00,000 from Sandeep
- Cash A/c – Debit (Receiver) ₹1,00,000
- Sandeep A/c – Credit (Giver) ₹1,00,000
b) Artificial Personal Account
These accounts do not belong to a natural person but to entities or organizations created by law. Although they are not living persons, they act as separate legal entities.
For Examples: Bank Account, Company Account, Partnership Firm Account, Club Account, etc.
In simple terms: Artificial Personal Accounts are the accounts of legal entities or organizations that are not natural persons.
Example: Deposited ₹1,000 in Bank
- Bank A/c – Debit (Receiver) ₹1,000
- Cash A/c – Credit (Giver) ₹1,000
c) Representative Personal Account
When an account represents a particular person or group of persons, it is called a Representative Personal Account. For instance, outstanding expenses, prepaid expenses, or any account that indirectly represents a person.
In simple terms: Representative Personal Accounts represent one or more persons indirectly.
Example: Company buys a patent for ₹50,000
- Patent A/c – Debit (Comes in) ₹50,000
- Cash A/c – Credit (Goes out) ₹50,000
In other words: Personal Accounts are related to individuals, firms, or institutions.
- Debit the receiver – Money goes to someone
- Credit the giver – Money comes from someone
Example: Rent paid to Landlord
- Landlord A/c – Debit (Receiver)
- Cash A/c – Credit (Giver)
Real Account
Real Account Rule – Debit what comes in, Credit what goes out
A Real Account relates to all the assets and properties owned by a business those whose value can be measured in monetary terms. These accounts record transactions involving the acquisition and disposal of such assets.
All assets that belong to a business, whether tangible or intangible, fall under the category of Real Accounts.
There are two types of Real Accounts:
a) Tangible Real Account
These accounts represent assets that have a physical existence they can be seen, touched, felt, purchased, and sold. Examples: Cash Account, Stock Account, Furniture Account, Machinery Account, Building Account, etc.
In simple terms: Tangible Real Accounts are the accounts of things that can be touched and felt.
Example: Purchased machinery worth ₹1,000
- Machinery A/c – Debit (What comes in) ₹1,000
- Cash A/c – Credit (What goes out) ₹1,000
b) Intangible Real Account
These accounts represent assets that cannot be seen or touched, but their value can still be measured in monetary terms. Examples: Goodwill Account, Patent Account, Copyright Account, Trademark Account, etc.
In simple terms: Intangible Real Accounts are the accounts of things that cannot be touched, but have measurable value.
Example: Company buys a patent for ₹50,000
- Patent A/c – Debit (Comes in) ₹50,000
- Cash A/c – Credit (Goes out) ₹50,000
In other words: Real Accounts include all types of assets both tangible (e.g., cash, furniture, land) and intangible (e.g., patents, goodwill).
- Debit what comes in – When an asset is acquired
- Credit what goes out – When an asset is sold or leaves the business
Think of it this way: The movement of assets decides the entry what comes into the business is debited, and what goes out is credited.
Example: Bought furniture for office use
- Furniture A/c – Debit (Comes in)
- Cash/Bank A/c – Credit (Goes out)
Nominal Account
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| Nominal Accounts |
Nominal Account Rule – Debit all expenses and losses, Credit all incomes and gains
Nominal Accounts record all incomes, expenses, gains, and losses of a business. These accounts are temporary in nature and are closed at the end of the accounting period to determine the net profit or loss.
In simple terms, Nominal Accounts deal with items that affect the profit or loss of a business rather than its assets or liabilities.
a) Expenses Account
An Expenses Account records all the costs incurred by a business to operate and generate revenue. These include regular payments or obligations such as rent, salaries, wages, electricity, and other day-to-day expenses.
Examples: Salaries Paid, Rent Paid, Discount Allowed, Commission Paid, etc.
Example: Purchased goods from Sandeep for ₹10,000
- Purchases A/c – Debit (Expense) ₹10,000
- Cash A/c – Credit (What goes out – Real Account) ₹10,000
b) Income Account
An Income Account records the earnings or revenues that a business generates from its core or other activities.
Examples: Commission Received, Interest Received, Rent Received, Discount Received, etc.
Example: Business receives ₹10,000 as rent income
- Cash A/c – Debit (What comes in – Real Account) ₹10,000
- Rent Received A/c – Credit (Income) ₹10,000
In other words: Nominal Accounts record all expenses, losses, incomes, and gains of a business.
- Debit all expenses and losses – They decrease profit
- Credit all incomes and gains – They increase profit
Think of it this way:
- If it costs you, debit it.
- If it earns you, credit it.
Example: Rent paid in cash
- Rent A/c – Debit (Expense)
- Cash A/c – Credit (What goes out)
Conclusion
The Golden Rules of Accounting form the foundation of the double-entry bookkeeping system.
They ensure every transaction is recorded with equal debit and credit entries, maintaining the accuracy and balance of financial records.
By classifying accounts into Personal, Real, and Nominal, and applying the appropriate rule —
- Personal - Debit the Receiver, Credit the Giver
- Real - Debit What Comes In, Credit What Goes Out
- Nominal - Debit All Expenses and Losses, Credit All Incomes and Gains
businesses can record transactions systematically and maintain clear, transparent, and reliable books of accounts.
Understanding and applying these rules correctly is essential for anyone involved in finance, accounting, or business management. They are not just principles they are the language of accounting that ensures every financial story is told accurately.
FAQ's
What are the Golden Rules of Accounting?
The Golden Rules of Accounting are basic principles used to determine which account to debit and which to credit while recording financial transactions under the double-entry system of accounting.
Why are the Golden Rules of Accounting important?
These rules ensure that all transactions are recorded accurately and systematically. They maintain the balance of accounts and help prepare correct financial statements like the Profit & Loss Account and Balance Sheet.
What are the three types of accounts in accounting?
The three types of accounts are:
- Personal Account – Relates to individuals, firms, or organizations.
- Real Account – Relates to assets (tangible and intangible).
- Nominal Account – Relates to incomes, expenses, gains, and losses.
What is the difference between Real and Nominal Accounts?
- Real Accounts represent assets that have ongoing value to the business.
- Nominal Accounts represent incomes and expenses that are temporary and closed at the end of the accounting period.
What is meant by ‘Debit’ and ‘Credit’?
- Debit (Dr) means an increase in assets or expenses, or a decrease in liabilities or income.
- Credit (Cr) means an increase in liabilities or income, or a decrease in assets or expenses.
How do the Golden Rules help in day-to-day business?
They provide a simple and consistent approach for recording transactions. Whether you are purchasing goods, paying rent, or earning income, these rules help ensure that entries are correct and compliant with accounting standards.
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