3 Golden Rules of Accounting

Three Golden Rules of Accounting

The three golden rules of accounting are statements that establish guidance on how to record transactions. As per accounting rules, all the accounting transactions are recorded in the books of the entity using the double-entry accounting method. A double-entry accounting method means for each transaction we involve two (or more) accounts. Debit one account and credit the other account with the same amount.

For example: If a person purchases an asset on credit for Rs. 10,000, then the accounting is by crediting cash and debiting the asset account simultaneously with an amount of Rs. 10,000.

Benefits of three golden rules of accounting:

Accounting rules work as a base for any accounting framework. Before applying accounting principles a person should know the basic accounting rules in a transaction. i.e. which account to debit and which account to credit. 

Accounting rules are used uniformly by all entities and the results are used in consistent and comparable financial reports.

Accounting Rules of Debit and Credit:

There are rules of debit and credit to record transactions. One is the traditional approach and the other is the modern approach. The definition is below for both approaches:

Three Golden Rules of Accounting (Traditional Approach):

Golden rules of accounting are the basic accounting rules on the basis of which we record accounting entries.

1. Personal Account: 

The rule related to the Personal account states debits the receiver and credits the giver. In other words, if a person receives something, the receiver’s account shall be debited and if a person gives something, the giver’s account shall be credited. 

For example, if Mr. X receives cash of Rs. 10,000 from Mr. Y then in the books of Mr. Y, Mr. X will be the receiver so the account of Mr. X will be debited with an amount of Rs. 10,000. 

2. Real Account:

The rule related to real accounts states that debits what comes in, and credit what goes out. In other words, if something comes into the business, we debit it and if something goes out of business, we credit it. 

For example, when we purchase an asset for cash we account as per the rules of real account wherein the asset is what came into the business. We debit the asset account and cash is something that got out of business, so we credit the cash account.

3. Nominal Account: 

The rule related to nominal account states that debit all expenses and losses, and credit all incomes and gains. In other words, if we incur any expense or loss for the business, we need to debit the expense or loss account. If we earn any income or gain in a business, we credit the income account or gain/profit account.  For example: If we pay salaries to employees then salary is an expense and hence we debit the salary account. Likewise, if we receive any rent we credit it to the rent account as it is an income.

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Modern Three Golden Rules of Accounting (Classification of Accounts):

As per modern rules of accounting, we categorize the transaction into 6 heads of accounts. We either debit or credit any increase or decrease in such accounts as shown in the table given below:

Types of AccountAccount to be        debitedAccount to be      credited
Assets accountIncreaseDecrease
Liabilities accountDecreaseIncrease
Capital accountDecreaseIncrease
Revenue accountDecreaseIncrease
Expenditure accountIncreaseDecrease
Withdrawal accountIncreaseDecrease

For example

Mr. X sold goods to B for Rs. 6,000 on credit. In such a case, Mr. X will record two accounts. One is B (Debtor Account which is an asset account) and the other is sales (which is a revenue account). In this case, since revenue has increased. So, we increase asset accounts, debit the assets, and credit the sales. Entry will be:

B (Debtor) Account Dr. To Sales Account (Goods sold to B on credit). Hence, it can be concluded that the accounting rule is the basis of accounting. Once a transaction has been done, it shows how that transaction should be recorded in the books.   

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