The golden rules of Accounting are the basis of recording all day to day financial business transaction. In which book we record all these transactions is known as Journal Book. The Journal book is maintained in chronological order (i.e. Date wise). To understand the Golden rules of account, first, we have to know the type of accounts because rules are applied to the transaction on the basis of the type of account.
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Type of Accounts: –
According to the golden rules of accounting, accounts are divided into three categories. These are explained with the examples as following: –
Real Accounts:
The real account is a ledger account relating to all assets of the business enterprise. This rule is applicable to the following business transactions: –
- Purchase 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.
The asset is that valuable thing or property which the business owns and gets the benefits from it in the future or uses it in generating income.
The example of assets on which the Real Account is applicable:-
- Land and Building,
- Furniture
- 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.”
Personal Accounts:
This rule is applicable to all individuals. The individuals are three types shown as following: –
- Persons: – Natural Person.
- Artificial persons: – The person created by humans.
- Representative persons: – Those accounts which represent the person or group of persons.
Example of accounts on which the Personal Account is applicable: –
- Examples of Persons: – Amanpreet, Jazz, Pawan Kumar, Vijay, Amir Khan. Etc.
- Examples of Artificial persons: – Ram And Sons., HAPPSS Store., Bank A/c (SBI), Reliance Industries Ltd. Etc.
- Examples of Representative persons: – Outstanding Salary, Prepaid Expenses, Accrued Income, Pre- received Income, Etc.
Nominal Accounts:
The accounts which are related to the expenses, income, losses, and gains are included in the nominal account.
Example of all accounts on which the Nominal Account is applicable:-
- Expenses Accounts: –Salary, Wages, Purchases, Electricity bill, Telephone, and mobile Rent, Transportation charges, Rent Paid, Etc.
- Incomes Accounts: – Sales, Commission Received, Rent on sublet building received, Etc.
- Losses Accounts: – Loss on sale of an asset, Loss by Theft, Loss by fire, loss by an accident, Etc.
- Profits Accounts: – Profit on sale of an asset, Etc.
Click here to check the meaning of Expenses, Income, and Losses/Profits.
The three Golden Rules of Accounting: –
|
Type of Accounts |
The Golden Rules of Accounting |
| 1. Real Accounts | Debit: What comes in Credit: What goes out |
| 2. Personal Accounts | Debit:- The Receiver Credit: The Giver |
| 3. Nominal Accounts | Debit:- All Expenses and Losses Credit:- All income and gains |
How to apply the Golden Rules of Accounting?
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 of the cases, these rules are very difficult to understand how to apply it, 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
Thats very nice, clear and crisp explanation of accounts Amandeep. I really like it to have it understood from an Indian Tutor who explains using Indian words, accounts and terminolgies that I could relate.
Thanks a lot jasmeet