Golden rules of Accounting | Explain with example

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: –

1. 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 asset.

The asset is that valuable thing or property which the business owns and get the benefits from it in future or use 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.”

2. Personal Accounts:

This rule is applicable to all Individual. The individuals are three types shown as following: –

1. Persons: –  Natural Person.
2. Artificial persons: – The person created by human.
3. 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.

3. 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 an 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 on any transaction. We have explained these all rules individually with examples as follow: –

1. Real Accounts:

We’ll show you, How you can apply Golden Rules of accounting with 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

Solution: –

Firstly get 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 on these accounts	Affect of a transaction to these accounts	The condition of Rule applied	According to Rule, get 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
	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 it in the next topic.

This topic is also available in Hindi. Click Here

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