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- 3 Golden Rules of Accounting - Types & Examples
Updated on: 23 Nov, 2023 11:53 AM
Accounting today is much more than bookkeeping. Two important aspects of accounting are debit and credit. We must only enter a transaction after understanding the detailed meaning of which account should be debited or credited.
When a financial transaction takes place, it affects two accounts, and in the dual entry system of accounting, we have two columns for entering our transactions. As we all know, one is the debit side, and the other is the credit side. To understand an accounting entry, first, we need to understand the account types and their corresponding debit credit rule.
For a beginner in the accounting field, one must go through the tough choice of selecting the rule. Basically, accounting can be done following the
1- Universal, Traditional or British Approach of Debit/Credit
2- Modern or American approach
In the Traditional Approach, the key concept is to classify various accounts under two broad categories, i.e., Personal and Impersonal Accounts which we will discuss further in detail. Whereas, Modern Approach uses the Accounting Equation to classify different transactions.
Contents
- What are the Golden Rules of Accounting?
- Real Account
- Personal Accounts
- Nominal Accounts
- Examples of 3 Rules of Accounting
- Goods amounted to Rs. 15000 purchased from Mr. Mohan on Credit
- Cash paid to Mr. Mohan for credit purchases
- Goods sold to Mr. Rehman for Rs. 20000 in cash
- Rs. 10000 withdrawn from the bank
- Machinery of Rs. 50000 purchased from M/s Bharti Traders and paid Rs. 25000 in cash and remaining to be paid on the future date.
- Balance amount of Rs. 25000 to M/s Bharti Traders is paid in full
- Machinery is sold to John for Rs. 55000.
- Modern Approach
- Rules for Debit and Credit ( Modern Classification)
- Frequently Asked Questions
What are the Golden Rules of Accounting?
The Golden Rules of Accounting, also known as the fundamental principles of accounting, are the basic guidelines that govern how financial transactions should be recorded. They are the cornerstone of accounting and are divided into three main categories:
Personal Account:
- Debit the Receiver, Credit the Giver: When dealing with personal accounts like individuals or organizations, debit what comes in and credit what goes out.
Real Account:
- Debit what comes in, Credit what goes out: For tangible assets like cash, property, or goods, debit what increases the account and credit what decreases it.
Nominal Account:
- Debit all expenses and losses, Credit all incomes and gains: For accounts related to expenses, incomes, gains, or losses, debit the ones that decrease profits and credit the ones that increase profits.
These rules form the foundation for recording transactions accurately in the accounting system. They guide accountants in maintaining the balance between debits and credits, ensuring that financial records accurately represent a company's financial health.
Real Account
Real Accounts are a set of tangible aspects of business like furniture, cash, etc. It contains transactions related to the assets and liabilities of the company. The asset category can be further subdivided into tangible and intangible assets. Real accounts deal with material assets of the business.
- If the item that belongs to the real account is coming into the business, it should be written on the Debit side while making the accounting entries.
- If the item of the real account is going out of business, it should be written on the Credit side while making the accounting entries.
The accounting rule of a real account goes like
“Debit what comes in,
credit what goes out”
Personal Accounts
- Personal accounts can be considered a general ledger related to people, associations, and companies.
- If the person/ group of persons/ legal body is receiving something from the business, then – Debit the receiver
- If the person/ group of persons/ legal body is paying something to the business – Credit the payer or giver
The accounting rule of the personal account goes like
“Debit the receiver,
Credit the giver”
Nominal Accounts
Nominal Accounts represent all the transactions of business like Expenses, Losses, Income, and gains incurred while doing business. Some common, e.g., are
- Electricity Expenses,
- Telephone Expenses,
- Interest Received,
- Profit on the Sale of Machines, etc.
If it’s an expense or loss for the business – Debit
If it’s an income or gain for the business – credit
The accounting rule of the nominal account goes like
“Debit all expenses and losses,
credit all incomes and gains”
To summarize, the three Golden Accounting Rules or three rules of accounting can be better understood as
| Rules For Accounting | Real Accounts | Personal Accounts | Nominal Accounts |
|---|---|---|---|
| Debit | What comes in | The Receiver | Expenses and Losses |
| Credit | What goes out | The Giver | Incomes and Gains |
Examples of 3 Rules of Accounting
The above three golden rules can be better decoded with the help of some illustrative accounting transactions like
- Goods amounted to Rs. 15000 purchased from Mr. Mohan on Credit
- Cash paid to Mr. Mohan for credit purchases
- Goods sold to Mr. Rehman for Rs. 20000
- Rs. 10000 withdrawn from the bank
- The machinery of Rs. 50000 was purchased from M/s Bharti Traders and paid Rs. 25000 in cash, and the remaining to be paid on a future date.
- The balance amount of Rs. 25000 to M/s Bharti Traders is paid in full
- Machinery is sold to John for Rs. 55000.
| Transactions | Accounts Involved | Types of Accounts |
|---|---|---|
| Goods Purchased from Mr. Mohan on Credit | Mr. Mohan Inventory (Stock) | Personal Account Real Account |
| Cash paid to Mr. Mohan | Mr. Mohan Cash | Personal Account Real Account |
| Goods sold to Mr. Rehman | Bank Inventory (Stock) | Real Account Real Account |
| Cash withdrawn from Bank | Cash Bank | Real Account Real Account |
| Machinery Purchased from M/s Bharti Traders | M/s Bharti TraderMachineryBank | Personal AccountReal AccountReal Account |
| Cash paid to M/s Bharti Traders | M/s Bharti TraderCash | Personal AccountReal Account |
| Machinery Sold to John at a Profit | JohnMachineryGain on sale of Machine | Personal AccountReal AccountNominal Account |
Let’s apply the golden rules to each of these transactions to formulate a Journal Entry:
Goods amounted to Rs. 15000 purchased from Mr. Mohan on Credit
The Golden rule for Real and Personal Accounts:
- a) Debit what comes in
- b) Credit the giver
The Journal entry will be:
| Inventory A/c | Dr. | 15000 | |
| To Mr. Mohan | 15000 |
Cash paid to Mr. Mohan for credit purchases
The Golden rule for Real and Personal Accounts:
- a) Debit the receiver
- b) Credit what goes out
The Journal entry will be:
| Mr. Mohan | Dr. | 15000 | |
| To Cash A/c | 15000 |
Goods sold to Mr. Rehman for Rs. 20000 in cash
The Golden rule for Real and Real Accounts:
- a) Debit what comes in
- b) Credit what Goes out
The Journal entry will be:
| Bank A/c | Dr. | 20000 | |
| To Inventory | 20000 |
Rs. 10000 withdrawn from the bank
The Golden rule for Real Accounts:
- a) Debit what comes in
- b) Credit what goes out
The Journal entry will be:
| Cash A/c | Dr. | 10000 | |
| To Bank A/c | 10000 |
Machinery of Rs. 50000 purchased from M/s Bharti Traders and paid Rs. 25000 in cash and remaining to be paid on the future date.
The Golden rule for Real and Personal Accounts:
- a) Debit what comes in
- b) Credit the giver
- c) Credit what goes Out
The Journal entry will be:
| Machinery A/c | Dr. | 50000 | |
| To M/s Bharti Traders | 25000 | ||
| To Bank A/c | 25000 |
Balance amount of Rs. 25000 to M/s Bharti Traders is paid in full
The Golden rule for Personal and Real Accounts:
- a) Debit the receiver
- b) Credit what goes out
The Journal entry will be:
| M/s Bharti traders | Dr. | 25000 | |
| To Bank A/c | 25000 |
Machinery is sold to John for Rs. 55000.
The Golden rule for Personal, Real and Nominal Accounts:
- a) Debit what comes in
- b) Credit the giver
- c) Credit all Income and Gains
The Journal entry will be:
| Bank A/c | Dr. | 55000 | |
| To Machinery A/c | 50000 | ||
| To Gain on Sale of Machinery | 5000 |
Modern Approach
Under this approach all the accounts are classified into the following five categories
- Assets Accounts
- Liability Accounts
- Capital Accounts
- Revenue Accounts
- Expense Accounts
Assets Accounts
Assets accounts are those accounts which relate to the economic resources of an enterprise, such as Land and Building, Plant and Machinery, Furniture, Inventory, Bank and Cash, etc. These are further categorized into tangible and intangible and current assets or fixed assets.
Liability Accounts
Liability accounts are accounts of lenders, creditors for goods, outstanding expenses, etc.
Capital Accounts
These are the accounts of proprietors/partners who have invested an amount in the business. It includes both Capital Account and Drawings Account.
Revenue Accounts
These are accounts of incomes and gains like Sales, Discounts Received, Interest Received, Bad Debts recovered, etc.
Expense Accounts
These are the accounts of expenses or losses incurred in carrying the business. Examples like purchase, wages, salary, depreciation, discount allowed, and rent.
| Types of accounts | Accounts to be debited | Accounts to be credited |
|---|---|---|
| Asset Accounts | Increase | Decrease |
| Liability Accounts | Decrease | Increase |
| Capital Accounts | Decrease | Increase |
| Revenue Accounts | Decrease | Increase |
| Expenses Accounts | Increase | Decrease |
Rules for Debit and Credit ( Modern Classification)
Now that you are aware of the golden rules of debit and credit for accounting, we hope, the accounting will be much easier to handle. Well, it is important to maintain your accounts as it helps you keep track of your expenses and income and helps you furnish accurate records and documents while filing your ITR. File your ITR Now with Tax2win or
to get the best efiling experience.
Frequently Asked Questions
Q- In accounting, why do we debit the receiver and credit the giver?
This is one of the three golden rules of accountancy in which the receiver is debited, and the giver is credited. This is done in the case of personal account-type transactions.
Q- Which accounting standards are applicable as per Section 133 of the Companies Act, 2013?
As per the sec, 133 of the companies act 2013, Central government will prescribe accounting standards recommended by ICAI and in consultation with NFRA.
Q- Is a sales or a purchases account a real or a nominal account?
Sales and purchase accounts can be treated as nominal accounts. According to the nominal account, Debit all expenses and credit all the gains, and we can see that purchases are expenses and sales are receipts.
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CA Abhishek Soni
Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.
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As a seasoned expert in taxation and accounting, I've navigated the intricate landscape of financial management, tax planning, and compliance for over a decade. My expertise extends to various tools and services that streamline the process of income tax filing and financial planning, ensuring individuals and businesses maximize their returns while adhering to legal standards.
Now, diving into the content you provided, it revolves around accounting principles, specifically focusing on the Golden Rules of Accounting and the Modern Approach to debit and credit classification. Let me break down the concepts covered in the article:
Golden Rules of Accounting:
-
Personal Account:
- Debit the Receiver, Credit the Giver: Applies to individuals or organizations. Debit when receiving, credit when giving.
-
Real Account:
- Debit what comes in, Credit what goes out: Pertains to tangible assets like cash, property, or goods. Debit for increases, credit for decreases.
-
Nominal Account:
- Debit all expenses and losses, Credit all incomes and gains: For accounts related to expenses, incomes, gains, or losses. Debit for decreases in profits, credit for increases.
Examples of 3 Rules of Accounting: Illustrative transactions applying the golden rules:
- Goods purchased on credit
- Cash paid for credit purchases
- Goods sold for cash
- Cash withdrawal from the bank
- Machinery purchased and paid in installments
- Payment in full to a creditor
- Sale of machinery with a profit
Modern Approach:
Under this approach, accounts are classified into five categories:
- Assets Accounts: Increase with debit, decrease with credit.
- Liability Accounts: Increase with credit, decrease with debit.
- Capital Accounts: Increase with credit, decrease with debit.
- Revenue Accounts: Increase with credit, decrease with debit.
- Expense Accounts: Increase with debit, decrease with credit.
Rules for Debit and Credit (Modern Classification): Understanding the modern approach to debit and credit based on account categories.
Frequently Asked Questions: Clarifications on common queries related to accounting, such as why we debit the receiver and credit the giver, applicable accounting standards, and the nature of sales and purchase accounts.
In conclusion, the article provides a comprehensive overview of accounting principles, offering a blend of traditional golden rules and modern approaches to ensure a well-rounded understanding for individuals and businesses alike. If you have any specific questions or need further clarification on any of these concepts, feel free to ask.
