3 Golden Rules of Accounting

Three Golden Rules of Accounting

Accounting rules are statements that establish guidance on how to record transactions. As per accounting rules, all the accounting transactions should be recorded in the books of the entity using the double entry accounting method. Double entry accounting method means for each transaction two (or more) accounts are involved, one account shall be debited and the other account shall be credited with the same amount.

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

Benefits of Accounting Rules:

Accounting rules work as a base for any accounting framework. Before applying accounting principles a person is required to know the basic accounting rules in a transaction which account should be debited and which account should be credited. 

Accounting rules are used uniformly by all entities and thus using them results 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, both the approaches have been defined in detail below:

Golden Rules of Accounting (Traditional Approach):

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

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 receiver so account of Mr. X will be debited with an amount of Rs. 10,000. 

2. Real Account:

The rule related to real account states debits what comes in, credit what goes out. In other words, if something comes into the business, it shall be debited and if something goes out of business, it shall be credited. 

For example, An asset purchased for cash would be accounted as per rules of real account wherein asset is what came into the business, so asset account will be debited and cash is something that got out of business, so cash account will be credited.

3. Nominal Account: 

The rule related to nominal account states that debit all expenses and losses, credit all incomes and gains. In other words, if any expense or loss is incurred for the business, the expense or loss account shall be debited and if any income or gain is earned in a business, the income account or gain/profit account shall be credited.  For example: If salaries are paid to employees then salary is an expense and hence salary account shall be debited. Likewise, any rent received shall be credited to the rent account as it is an income.

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Modern Rules of accounting (Classification of Accounts):

As per modern rules of accounting, the transaction will be categorized into 6 heads or accounts and any increase or decrease in such account will either be debited or credited in the manner 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 and asset account has also increased, assets will be debited and sales will be credited. Entry will be:

B (Debtor) Account Dr. To Sales Account (Being 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.