3 golden rules of accounting

• Posted on Aug 4, 2021
• |
• By Shrotriyo S

The 3 golden rules are the internationally accepted rules of accounting. Every economic entity is liable to produce its financial transactions to all its stakeholders. The financial information presented must accurately reflect the financial standing of the entity. For this reason, accounting of all transactions plays a very important role. As separate entities are compared to understand their financial status, the accounting standard should be uniform. The 3 golden rules of accounting establish this uniformity, as it is the basis of passing journal which is the basic building block of all accounting and bookkeeping.

 3 golden rules of accounting

 Personal account: Debit the receiver

                                      Credit the giver

 Real Account: Debit what comes in

                              Credit what goes out

 Nominal Account: All expenses & losses are debit

                                      All income & gains are credit

Types of Accounts

To understand the above-mentioned golden rules of accounting, we must understand the types of accounts. The types of accounts classify all the different types of general ledgers. Alternatively, all the accounts will fall in the broad classifications given below:

• Personal Account
• Real Account
• Nominal Account

Personal Account

A Personal Account is a general ledger account. The accounts relating to persons, be it a natural person like an individual or person an artificial person like a company or club or other economic entity.

In the case of a personal account, when a business or individual entity is a receiver (receiver of goods or service in) a transaction from another individual entity or business. The first business becomes the receiver and the second business becomes the giver (of goods or a service)

In the above scenario, for a personal account, the golden rule is to Debit the receiver, credit the giver. By using this rule in an accounting example, you should debit the personal and credit the business account

Example: Ganesh (an individual) buys groceries worth 500 rupees

Real Account

A Real Account is a general ledger account relating to Assets and Liabilities other than people accounts. These are accounts that don’t close at year-end and are carried forward. An example of a Real Account is a Bank Account.

The golden rule of accounting for real account states,  Debit what comes in, Credit what goes out.  In the case of a real account when the business receives something of value (goods or service), the transaction in the book is shown as debit. Alternatively, If something of value goes out of business it is represented as credit in the books

Example: A purchase of a computer for 20,000 by a business in cash

Nominal Account 

 A Nominal Account is a General ledger account pertaining to all recurring  income, expenses and  losses and gains. All the transactions in a nominal account are stored for a year and then transferred to a permanent account at the end of the financial year. Such accounting allows for a business to reset the balances to zero and start again at the end of the financial year.

An example of a Nominal Account is an Interest Account.

The golden rule of accounting for nominal account states Debit all expenses and losses, Credit all income and gains.  If a business incurs an expense or suffers a loss, the transaction is shown as debit. However, if a business earns a profit or gains an income then it is shown as credit in the books.

Example: A business pays a Salary (expense ) of 30,000 to its employees in cash 

The above explanation and illustrations are the very basis of accounting and bookkeeping. Although accountancy as a subject is not limited to just the golden rules,  the 3 rules act as the basics of the platform.

• Posted on Aug 4, 2021
• |
• By Shrotriyo S
• |
• 0 Comments