3 Golden rules of Accounting | Concepts behind it Explained with examples

Every business (it may be Profit Or Non Profit organization) has to furnish the record of its financial business transactions in the form of accounting books to the interested parties (It may be the owner, investors, government departments, etc.). The golden rules of accounting provide the standardized regulation to the accountant to record all financial business transactions to prepare the accounting books, So that’s why it is very important to learn. 

What are the Golden Rules of Accounting?

The golden rules of Accounting are the provide 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 debit and another is 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 on the basis of 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 are also invented which have five types of rules and we have explained it in the next article.

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Types of Accounts as per the Golden rules of Accounting

The golden rules of accounting are implemented on all ledger accounts i.e. assets, liabilities, incomes, gains, expenses, losses which are involved in the business transactions, So according to the golden rules of accounting the ledger accounts are classified into three types. These are explained with the examples as following: –

1. Real Account

As per the golden rules of accounting, the real accounts include those accounts that are related to assets of the business enterprise. So, This rule is applicable to the following business transactions which are related to the assets accounts: –

• Purchase/Creation of assets,
• Sale of assets,
• Depreciation charged on the assets, and
• Dispose of an asset.

Now to apply this rule, we have to know the meaning of assets.

What is an asset?

The asset is that valuable thing or property which the business or individual owns and gets the benefits from it in the future or used in generating income. In other words, The tangible objects and the intangible right owned by the business enterprises are known as an asset.`

The example of assets on which the Real Account is applicable:- 

• Land and Building,
• Furniture and fixture
• Plant and Machine
• Vehicles
• Cash
• Trademarks
• Copyright

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.”

2. Personal Account

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, Amir Khan. Etc. 

2. Artificial persons: – The accounts which do not have any physical existence and 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.

3. Nominal Account

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:-

• Expense Accounts: –Salary, Wages, Purchases, Electricity bill, Telephone, and mobile Rent, Transportation charges, Rent Paid, Etc.
• Income Accounts: – Sales, Commission Received, Rent on sublet building received, Etc.
• Loss Accounts: – Loss on sale of an asset, Loss by Theft, Loss by fire, loss by an accident, Etc.
• Profit Accounts: – Profit on sale of an asset, Etc.

Click here to check the meaning of Expenses, Income, and Losses/Profits.

The 3 Golden Rules of Accounting

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

1. Real Rule/Account

As I have explained above in the types of accounts that the Real rule is only applicable to the asset’s 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 from the business. 

So, you have to debit the asset’s account when a business purchase or create the assets and credit the asset’s account when a business sale or dispose of the assets. 

2. Personal Rule/Account

As per the types of accounts, the Personal Rule is applicable to all types of personal accounts. It means as per the statement of the Personal Rule, Debit the person’s account (it may be natural, artificial, or representative person) when a person received something from our business (it may be goods or services) and Credit the person’s account when a person gives something to our business. 

3. Nominal Rule/Account

As per the types of accounts, the Nominal Rule is applicable to expenses/losses and income/gains accounts. It means as per the statement of the Nominal Rule, Debit the Expense’s/losses account when a business incurred some expense or loss and Credit the Income’s/gain’s account when a business earned income or get gains.

How to apply the Golden Rules of Accounting to any transaction in an easy way?

After understanding all three types of accounts and the rules of accounting now question raised is how we can apply it to any transaction. We have explained these all rules individually with examples as follow: –

1. Real Accounts

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 got 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 name into the standard format of 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)

The above-shown format is the standard format for Journal Entries in Accounting. if you want more explanation about it please visit the following link. 

Journal Entries | Meaning | Format | Examples

2. Personal Accounts

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 got the name of the Debit and the credit account.	Debit (What comes in)	Credit (The Giver)

*Download image in PNG:- 

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 name into the standard format of 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)

3. Nominal Accounts

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 Expense and Losses	Goes out
6th	Now, in the end, you got the name of the Debit and the credit account.	Debit (All Expense and Losses )	Credit (What goes out)

*Download image in PNG:- 

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 name into the standard format of journal daybook as shown below: –

Date	Particulars	L.F.	Debit	Credit
	Salary a/c                             Dr.		10,000
	To Cash a/c			10,000
	(Being salary paid to employees)

Example of Golden rules of accounting: –

Journalizing the following transactions.

Routine journal entries
S.No.	Transaction	Amount
1	Capital Introduced by 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 account shown below: –

S. No.	Select affected Accounts from the transaction	The Nature of Account	The Rule which will be applied to these accounts	Affect of a transaction to these accounts	The condition of Rule applied	According to Rule, get to know which account will be Dr./Cr.
1.	Cash a/c	Assets	Real Account	Cash received	What Comes in	Debit
	Capital a/c	Person	Person Account	the owner is giving cash to the business	The Giver	Credit
2.	Purchase a/c	Expenses	Nominal Account	Money spent on the purchase of goods	All expenses and losses	Debit
	Cash a/c	Assets	Real Account	Cash paid for the purchase of goods	What Goes out	Credit
3.	Cash a/c	Assets	Real Account	Cash received from the sale of goods	What comes in	Debit
	Sale a/c	Income	Nominal Account	money earned on the purchase of goods	All Income and gain	Credit
4.	Salary a/c	Expenses	Nominal Account	money spent on the paid salary	All expenses and losses	Debit
	Cash a/c	Assets	Real Account	Cash paid for salary	what Goes out	Credit
5.	Mr. A a/c	Person	Person Account	goods purchased by him	The receiver	Debit
	Sale a/c	Income	Nominal Account	money earned on the sale of goods	All Income and gain	Credit
6.	Purchase a/c	Expenses	Nominal Account	Money spent on the purchase of goods	All expenses and losses	Debit
	M/s Ram and Sons. a/c	Person	Person Account	Sold goods to us	The Giver	Credit
7.	Cash a/c	Assets	Real Account	Cash received	What comes in	Debit
	Mr. A a/c	Person	Person Account	paid cash to us	The Giver	Credit
8.	M/s Ram and Sons a/c	Person	Person Account	Cash received by him	The receiver	Debit
	Cash a/c	Assets	Real Account	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 started business with cash)
	Purchase a/c	Dr.		50,000
	To Cash a/c				50,000
	(Being Purchase good for cash)
	Cash a/c	Dr.		15,000
	To Sales a/c				15,000
	(Being sold goods for cash)
	Salary a/c	Dr.		3,000
	To Cash a/c				3,000
	(Being salary 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 Purchased goods 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)

Points to be remembered

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 got 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

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