Golden Rules of Accounting

Golden Rules of Accounting – Overview &
Types
Updated on Sep 29, 2020 - 02:07:03 PM
Every economic entity must present its financial information to all its stakeholders. The
information provided in the financials must be accurate and present a true picture of the entity.
For this presentation, it must account for all its transactions. Since economic entities are
compared to understand their financial statuses, there has to be uniformity in accounting. To
bring about uniformity and to account for the transactions correctly there are three Golden Rules
of Accounting.
These rules form the very basis of passing journal entries which in turn form the basis of
accounting and bookkeeping.
 Types of accounts
 Golden rules of accounting
 Conclusion
Types of accounts
To understand the Golden Rules of Accounting we must first understand the types of accounts.
The account classification applies to all the types of general ledgers. In other words, every
account will fall in one of the broad classifications given below.
There are three types of accounts:
 Real Account
 Personal Account
 Nominal Account
A Real Account is a general ledger account relating to Assets and Liabilities other than people
accounts. These are accounts that don’t close at year-end and are carried forward. An example of
a Real Account is a Bank Account.
A Personal account is a General ledger account connected to all persons like individuals, firms
and associations. An example of a Personal Account is a Creditor Account.
A Nominal account is a General ledger account pertaining to all income, expenses, losses and
gains. An example of a Nominal Account is an Interest Account.
Golden rules of accounting

Looking at the nature of all the accounts, the accounting rules have been devised. For each
account there is a set of Golden Rules and hence there are three Golden Rules of
Accounting. The Golden rules define the treatment of all transactions conducted by the business.

Illustration
An entity named Orange Ltd. has the following transactions.
1. It deposits Rs.10,000 into Bank

2. It buys goods worth Rs.50,000 from Apple Ltd.
3. It sells goods worth Rs.35,000 to Melon Ltd.
4. It pays Rs.12,000 as Rent for its premises
5. It earns Rs.3,000 as interest on a bank account.
First of all, let us identify the accounts involved in these transactions and classify them into the
different types of accounts:
Transaction Accounts involved Type of Accounts
Deposit Rs.10,000 in Bank Bank Account Real Account – Asset account

Cash Account Real Account – Asset account
Purchase goods worth Rs.50,000 from Apple Purchase Account Nominal Account – Expense account
Ltd.
Apple Ltd. Account Personal Account – Creditors
account
Sale of goods worth Rs. 35,000 to Melon Ltd. Sales Account Nominal Account -Income Account
Melon Ltd. Personal Account – Debtors Account
Account
Pays Rs.12,000 as rent Rent Account Nominal Account

Bank Account Real Account – Asset account
Earn Rs.3,000 as interest on Bank account Interest received Nominal Account – Income Account
Bank Account Real Account – Asset Account
Now applying the golden rules to each of the transactions we will get the following journal
entries :
 Deposit Rs.10,000 in Bank
Both Bank and Cash are real accounts and so the Golden rule is:
 Debit what comes into the business

 Credit what goes out from the business
So the entry will be:
Bank A/C Dr. 10,000
To Cash A/ C 10,000
 Purchase goods worth Rs.50,000 from Apple Ltd.
The Purchase Account is a Nominal account and the Creditors Account is a Personal account.
Applying Golden Rule for Nominal account and Personal account:
 Debit the expense or loss

 Credit the giver
The entry will be:
Purchase A/C Dr 50,000
To Apple Ltd. A/C 50,000
 Sale of goods worth Rs.35,000 to Melon Ltd.
The sale account is a Nominal account and the Debtors Account is a Personal account.
Hence the Golden Rule to be applied is:
 Debit the receiver

 Credit the income or gain
Thus the entry will be:
Melon Ltd. A/C Dr 35,000
To Sales A/C 35,000
 Pays Rs.12,000 as rent
Rent is a Nominal account and Bank is a real account.

The Golden Rule to be applied is:
 Debit the expense or loss

 Credit what goes out of business
The entry thus will be:
Rent A/C Dr. 12000

To Bank A/C 12000
 Earn Rs.3,000 as interest on Bank Account
Interest and Bank are Nominal account and Real Account.

The Golden rule to be applied is:
 Debit what comes into the business

 Credit the income or gain
Hence the entry will be:
Bank A/C Dr 3,000
To Interest Received A/C 3,000
Conclusion
All transactions of an entity must be accounted for. To account these transactions the entity must
pass journal entries which will then summarise into ledgers. The journal entries are passed on the
basis of the Golden Rules of accounting. To apply these rules one must first ascertain the type of
account and then apply these rules.
 Debit what comes in, Credit what goes out

 Debit the receiver, Credit the giver
 Debit all expenses Credit all income
These lay the foundation of accounting and hence are called the Golden Rules of accounting.
They are like the letters of the English alphabet. If one does not know the letters he cannot put
words and hence, will not be able to use the language. Similarly for accounting, if one does not
know the golden rules, he cannot pass journal entries and hence won’t be able to accurately
account for the transactions.

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Golden Rules of Accounting – Overview &

Golden rules of accounting

1. It deposits Rs.10,000 into Bank

Deposit Rs.10,000 in Bank Bank Account Real Account – Asset account

Pays Rs.12,000 as rent Rent Account Nominal Account

 Deposit Rs.10,000 in Bank

 Debit what comes into the business

So the entry will be:

Bank A/C Dr. 10,000

To Cash A/ C 10,000

 Purchase goods worth Rs.50,000 from Apple Ltd.

 Debit the expense or loss

The entry will be:

Purchase A/C Dr 50,000

To Apple Ltd. A/C 50,000

 Sale of goods worth Rs.35,000 to Melon Ltd.

 Debit the receiver

Thus the entry will be:

Melon Ltd. A/C Dr 35,000

To Sales A/C 35,000

 Pays Rs.12,000 as rent

Rent is a Nominal account and Bank is a real account.

 Debit the expense or loss

The entry thus will be:

Rent A/C Dr. 12000

 Earn Rs.3,000 as interest on Bank Account

Interest and Bank are Nominal account and Real Account.

 Debit what comes into the business

Hence the entry will be:

Bank A/C Dr 3,000

To Interest Received A/C 3,000

 Debit what comes in, Credit what goes out

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