Golden Rules of Debit and Credit for Accounting

The Three Golden Rules of Accounting – Real, Personal and Nominal Accounts

Traditional Approach consists of rules popularly known as the Three Golden Rules of Accounting. These rules are applicable irrespective on all categories of the transaction. These three most talked about and basic Golden rules of accounting are to make debit and credit in accounting ledger by categorising each and every transaction or entry into either

• Real
• Personal or
• Nominal Accounts

Now let us take each accounting rule in detail.

Real Account

Real Accounts is a set of tangible aspects of business like furniture, cash, etc.

• If the item that belongs to the real account is coming into the business then while making the accounting entries it should be written on the Debit side.
• If the item of real account is going out of the business then while making the accounting entries it should be written on the Credit side.

Personal Accounts

• If the person/ group of persons/ legal body is receiving something from the business then – Debit the receiver
• If the person/ group of persons/ legal body is paying something to the business – Credit the payer or giver

Nominal Accounts

Nominal Accounts represents all the Expenses, Loses, Income and gains incurred while doing business.Some common e.g. are,

• Electricity Expenses,
• Telephone Expenses,
• Interest Received,
• Profit on Sale of Machines, etc.

If it’s an expense or loss for the business – Debit
If it’s an income or gain for the business – credit

To summarize, the three Golden Accounting Rules or three rules of accounting can be better understood as

Examples

The above three golden rules can be better decoded with the help of some illustrative accounting transactions like:

• Goods amounted to Rs. 15000 purchased from Mr. Mohan on Credit
• Cash paid to Mr. Mohan for credit purchases
• Goods sold to Mr. Rehman for Rs. 20000
• Rs. 10000 withdrawn from the bank
• The machinery of Rs. 50000 purchased from M/s Bharti Traders and paid Rs. 25000 in cash and remaining to be paid on the future date.
• Balance amount of Rs. 25000 to M/s Bharti Traders is paid in full
• Machinery is sold to John for Rs. 55000.

Let’s apply the golden rules to each of these transactions to formulate a Journal Entry:

Goods amounted to Rs. 15000 purchased from Mr. Mohan on Credit

The Golden rule for Real and Personal Accounts:

• a) Debit what comes in
• b) Credit the giver

The Journal entry will be:

Cash paid to Mr. Mohan for credit purchases

The Golden rule for Real and Personal Accounts:

• a) Debit what comes in
• b) Credit the giver

The Journal entry will be:

Goods sold to Mr. Rehman for Rs. 20000 in cash

The Golden rule for Real and Real Accounts:

• a) Debit what comes in
• b) Credit what Goes out

The Journal entry will be:

Rs. 10000 withdrawn from the bank

The Golden rule for Real Accounts:

• a) Debit what comes in
• b) Credit what goes out

The Journal entry will be:

Machinery of Rs. 50000 purchased from M/s Bharti Traders and paid Rs. 25000 in cash and remaining to be paid on the future date.

The Golden rule for Real and Personal Accounts:

• a) Debit what comes in
• b) Credit the giver
• c) Credit what goes Out

The Journal entry will be:

Balance amount of Rs. 25000 to M/s Bharti Traders is paid in full

The Golden rule for Personal and Real Accounts:

• a) Debit the receiver
• b) Credit what goes out

The Journal entry will be:

Machinery is sold to John for Rs. 55000.

The Golden rule for Personal, Real and Nominal Accounts:

• a) Debit what comes in
• b) Credit the giver
• c) Credit all Income and Gains

The Journal entry will be:

Modern Approach

Under this approach all the accounts are classified into the following five categories

1. Assets Accounts
2. Liability Accounts
3. Capital Accounts
4. Revenue Accounts
5. Expense Accounts

• Assets Accounts

  Assets accounts are those accounts which relates to the economic resources of an enterprise such as Land and Building , Plant and Machinery , Furniture, Inventory, Bank and Cash etc.

• Liability Accounts

  Liability accounts are accounts of lenders, creditors for goods, outstanding expenses etc.

• Capital Accounts

  These are the accounts of proprietors/partners who have invested amount in the business. It includes both Capital Account and Drawings Account.

• Revenue Accounts

  These are accounts of incomes and gains. Examples like Sales, Discounts Received, Interest Received, Bad Debts recovered , etc.

• Expense Accounts

  These are the accounts of expenses or losses incurred in carrying the business. Example like purchase, wages, salary, depreciation, discount allowed and rent.

Rules for Debit and Credit ( Modern Classification)