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✦ FREE LEARNING — CLASS 11 & 12 — CBSE · PSEB — ACCOUNTS · ECONOMICS · BST ✦
Every business (for-profit or non-profit organisation) has to furnish a record of its financial transactions in the form of accounting books to the interested parties (Theowner, investors, government departments, etc.). The golden rules of accounting provide standardized regulation for the accountant to record all financial business transactions to prepare the accounting books. That's why it is essential to learn.
The golden rules of Accounting provide the basis to record all day-to-day financial business transactions in the Journal Day Book. These rules will provide a minimum of two accounts from a single business transaction, one is a debit, and another is a credit, which is required to record the journal entry in the journal daybook. So you can say that these rules are the foundation of the Double-entry system. To understand the Golden Rules of Accounts, first, we have to know the types of accounts as per the Golden Rules of Accounts, because rules are applied to the transaction based on the type of accounts included in the transaction.
These rules are also known as traditional rules of accounting or traditional approaches to accounting. Now, modern rules of accounting or modern approaches to accounting have also invented, which have five types of rules, and we have explained them in the next article.
Watch our YouTube video of the Golden Rules of Accounting to understand the concept behind the Golden Rules deeply.
The golden rules of accounting are implemented on all ledger accounts, i.e. assets, liabilities, incomes, gains, expenses, and losses, which are involved in business transactions. According to the golden rules of accounting, the ledger accounts are classified into three types. These are explained with the examples as follows: -
As per the golden rules of accounting, real accounts include those related to the business enterprise's assets. So, this rule applies to the following business transactions, which are related to the asset accounts: -
Now, to apply this rule, we have to know the meaning of assets.
An asset is a valuable thing or property that the business or individual owns and gets the benefits from it in the future or uses to generate income. In other words, the tangible objects and the intangible rights owned by the business enterprises are known as assets.
The example of assets on which the Real Account is applicable:-
The list is very long; you will know all of them after completing this full tutorial.
"Click here to check out the types of assets."
As per the golden rules of accounting, personal accounts include those accounts that are related to all types of persons, i.e. natural persons, artificial persons, and representative persons. The three types of persons are explained as follows: -
1. Natural Persons: - The accounts which are related to human beings are known as natural persons. For example, Amanpreet, Jazz, Pawan Kumar, Vijay, and Amir Khan. Etc.
2. Artificial persons: - The accounts which do not have any physical existence and are created by laws are known as Artificial persons. For example, any business account may be a firm, company, bank, or institution.
3. Representative persons: - Those accounts which represent the person or group of persons are known as Representative persons. For example, Outstanding Salary, Prepaid Expenses, Accrued Income, Pre-received Income, Etc.
As per the golden rules of accounting, Nominal accounts include those accounts that are related to all expenses/losses and incomes/gains.
Example of all accounts on which the Nominal Account is applicable:-
Click here to check the meaning of Expenses, Income, and Losses/Profits.
|
Type of Accounts |
The Golden Rules of Accounting |
|---|---|
| 1. Real Account | Debit: What comes in Credit: What goes out |
| 2. Personal Account | Debit:- The Receiver Credit: The Giver |
| 3. Nominal Account | Debit:- All Expenses and Losses Credit:- All income and gains |
As I have explained above, in the types of accounts, the Real rule is only applicable to the asset accounts. It means, as per the statement of the Real rule, debit the asset's account when an asset comes into the business and credit the asset's account when an asset goes out.
So, you have to debit the asset's account when a business purchases or creates the assets and credit the asset's account when a business sells or disposes of the assets.
As per the types of accounts, the Personal Rule applies to all types of personal accounts. It means as per the statement of the Personal Rule, debit the person's account (it may be a natural, artificial, or representative person) when a person receives something from our business (it may be goods or services) and Credit the person's account when a person gives something to our business.
As per the types of accounts, the Nominal Rule applies to expenses/losses and income/gains accounts. It means as per the statement of the Nominal Rule, Debit the Expenses/losses account when a business incurred some expense or loss and Credit the Income/gain account when a business earns income or gains.
After understanding all three types of accounts and the rules of accounting, a question raised is how we can apply them to any transaction. We have explained all these rules individually with examples as follows: -
We’ll show you how you can apply the Golden Rules of accounting step by step with the following example: -
Example No. 1: Purchase Furniture for Rs 10,000/-
| Steps | Purchase Furniture for Rs. 10,000/- | ||
|---|---|---|---|
| 1st | Scan and select affected Accounts (From the transaction) | Furniture | 10,000/- Cash |
| 2nd | Select what type of Accounts these are (separately) | Asset Account | Asset Account |
| 3rd | Select the rule which will be applied to these accounts | Real Account | Real Account |
| 4th | What will be the effect of this transaction on these accounts | Purchased | Payment made |
| 5th | Which condition of the golden rule is applied to these accounts | Comes in | Goes out |
| 6th | Now, In the end, you get the name of the Debit and the credit account. | Debit (What comes in) | Credit (What goes out) |
Journal entry for the above Example: -
From the above table, we got the names of the debit account and the credit account. So, now we have to write these gotten names into the standard format of the journal daybook as shown below: –
| Date | Particulars |
L.F. | Debit | Credit | |
|---|---|---|---|---|---|
| Furniture a/c | Dr. | 10,000 | |||
| To Cash a/c | 10,000 | ||||
| (Being Furniture purchased) | |||||
Example No. 1: - Purchase of Furniture For Rs. 10,000/- from Aman on Credit.
| Steps | Purchase Furniture for Rs. 10,000/- From Aman on Credit | ||
|---|---|---|---|
| 1st | Scan and select affected Accounts (From the transaction) | Furniture | Aman |
| 2nd | Select what type of Accounts these are (separately) | Asset Account | Person Account |
| 3rd | Select the rule which will be applied to these accounts | Real Account | Personal Account |
| 4th | What will be the effect of this transaction on these accounts | Purchased | Selling furniture |
| 5th | Which condition of the Golden Rule is applied to these accounts | Comes in | Giver |
| 6th | Now, in the end, you get the names of the Debit and the credit account. | Debit (What comes in) | Credit (The Giver) |
Journal entry for the above Example
From the above table, we got the names of the debit account and the credit account. So, now we have to write these gotten names into the standard format of the journal daybook as shown below: –
| Date | Particulars |
L.F. | Debit | Credit | |
|---|---|---|---|---|---|
| Furniture a/c | Dr. | 10,000 | |||
| To Aman a/c | 10,000 | ||||
| (Being Furniture purchased on credit from Aman) | |||||
Example No. 1:- Salary paid to employees Rs. 5000/-.
| Steps | Salary paid to employees Rs. 5000/-. | ||
|---|---|---|---|
| 1st | Scan and select affected Accounts (From the transaction) | Salary | 5000/- Cash |
| 2nd | Select what type of Accounts these are (separately) | Expense Account | Asset Account |
| 3rd | Select the rule which will be applied to these accounts | Nominal Account | Real Account |
| 4th | What will be the effect of this transaction on these accounts | Expenses paid | Payment made |
| 5th | Which condition of the Golden Rule is applied to these accounts | All Expenses and Losses | Goes out |
| 6th | Now, in the end, you get the names of the Debit and the credit account. | Debit (All Expenses and Losses ) | Credit (What goes out) |
Journal entry for the above Example:
From the above table, we got the names of the debit account and the credit account. So, now we have to write these gotten names into the standard format of the journal daybook as shown below: –
| Date | Particulars |
L.F. | Debit | Credit | |
|---|---|---|---|---|---|
| Salary a/c | Dr. | 5,000 | |||
| To Cash a/c | 5,000 | ||||
| (Being salary paid to employees) | |||||
Journalize the following transactions.
Routine journal entries
| S.No. | Transaction | Amount |
|---|---|---|
| 1 | Capital Introduced by the owner | 100,000 |
| 2 | Purchase goods for cash | 50,000 |
| 3 | Sold goods for cash | 15,000 |
| 4 | Paid for Salary | 2,000 |
| 5 | Sold goods to Mr A | 50,000 |
| 6 | Purchase goods from M/s Ram and Sons. | 1,00,000 |
| 7 | Cash received from Mr A | 50,000 |
| 8 | Cash paid to M/s Ran and Sons. | 50,000 |
The solution of Example:
Firstly, get a debit and credit account for each transaction by applying the golden rule of accounts shown below: -
|
S. No. |
Select affected Accounts from the transaction |
The Nature of Account |
The Rule which will be applied to these accounts |
The effect of a transaction on these accounts |
The condition of the Rule applied |
According to the Rule, get to know which account will be Dr./Cr. |
|---|---|---|---|---|---|---|
| 1. | Cash a/c | Assets | Real rule | Cash received | What Comes in | Debit |
| Capital a/c | Person | Person rule | The owner is giving cash to the business | The Giver | Credit | |
| 2. | Purchase a/c | Expenses | Nominal rule | Money spent on the purchase of goods | All expenses and losses | Debit |
| Cash a/c | Assets | Real rule | Cash paid for the purchase of goods | What Goes out | Credit | |
| 3. | Cash a/c | Assets | Real rule | Cash received from the sale of goods | What comes in | Debit |
| Sale a/c | Income | Nominal rule | money earned on the purchase of goods | All Income and gains | Credit | |
| 4. | Salary a/c | Expenses | Nominal rule | money spent on the paid salary | All expenses and losses | Debit |
| Cash a/c | Assets | Real rule | Cash paid for salary | What goes out | Credit | |
| 5. | Mr A a/c | Person | Person rule | Goods purchased by him | The receiver | Debit |
| Sale a/c | Income | Nominal rule | money earned on the sale of goods | All Income and gains | Credit | |
| 6. | Purchase a/c | Expenses | Nominal rule | Money spent on the purchase of goods | All expenses and losses | Debit |
| M/s Ram and Sons. a/c | Person | Person rule | Sold goods to us | The Giver | Credit | |
| 7. | Cash a/c | Assets | Real rule | Cash received | What comes in | Debit |
| Mr A a/c | Person | Person rule | paid cash to us | The Giver | Credit | |
| 8. | M/s Ram and Sons a/c | Person | Person rule | Cash received by him | The receiver | Debit |
| Cash a/c | Assets | Real rule | Cash paid | What Goes out | Credit |
Journal Daybook
| Date | Particulars | L. F. | Debit | Credit | |
|---|---|---|---|---|---|
| Cash a/c | Dr. | 1,00,000 | |||
| To Capital a/c | 1,00,000 | ||||
| (Being business with cash) | |||||
| Purchase a/c | Dr. | 50,000 | |||
| To Cash a/c | 50,000 | ||||
| (Being purchased for cash) | |||||
| Cash a/c | Dr. | 15,000 | |||
| To Sales a/c | 15,000 | ||||
| (Being sold goods for cash) | |||||
| Salary a/c | Dr. | 2,000 | |||
| To Cash a/c | 2,000 | ||||
| (Salaries are paid to employees) | |||||
| Mr A a/c | Dr. | 50,000 | |||
| To Sales a/c | 50,000 | ||||
| (Being sold goods to Mr A on credit) | |||||
| Purchase a/c | Dr. | 1,00,000 | |||
| To M/s Ram and Sons. a/c | 1,00,000 | ||||
| (Being goods purchased from M/s Ram and Sons. on credit) | |||||
| Cash a/c | Dr. | 50,000 | |||
| To Mr A a/c | 50,000 | ||||
| (Being Payment received from Mr A) | |||||
| M/s Ram and Sons a/c | Dr. | 50,000 | |||
| To Cash a/c | 50,000 | ||||
| (Being Payment made to M/s Ram and Sons) | |||||
The steps involved in the application of the Golden Rules of Accounting are shown below: -
| Step No. | Description |
|---|---|
| 1st | Scan and select affected Accounts(From the transaction) |
| 2nd | Select What type of Accounts these are (separately) |
| 3rd | Select the rule which will be applied to these accounts |
| 4th | What will be the effect of this transaction on these accounts |
| 5th | Which condition of the golden rule is applied to these accounts |
| 6th | Now, In the end, you get the name of the Debit and the credit account. |
In some cases, these rules are very difficult to understand how to apply, So that's why Modern Rules of Accounting have come into existence. We have explained these rules in the next topic.
This topic is also available in Hindi. Click Here
Accounting & Commerce Educator
Sarbjit Singh holds a B.Com and M.Com degree and has over 12 years of teaching experience in double entry bookkeeping, financial accounting, and business studies.
Learn the 3 golden rules of accounting (Personal, Real & Nominal) with definitions, solved examples, and journal entries — plus a free quiz to test yourself.
Class 11 and Class 12 commerce students, and CA Foundation aspirants, studying Financial Accounting.
Yes — this page includes a short interactive quiz so you can check your understanding straight away.
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