Accounting is known as the language of business because, it helps to track and communicate financial data. Understanding of the golden rules of accounting is an important step for every businessman, student, and aspiring accountant.
Golden rules of accounting serve as the foundation for double entry accounting, ensuring that all financial transactions are precisely documented.
What are The Golden Rules of Accounting ?
Golden rules of accounting are a set of recommendations for accountants to follow while recording financial transactions.
Golden rules are based on dual entry system,that includes both debit and credit transactions.
These golden rules helps you to determine which accounts should be debited and which should be credited. These rules requires you to determine the kind of account for each transaction, each account type has its own set of rules that must be followed for every transaction.
Types of Accounts
1. Nominal Account
These are temporary accounts used to record revenue, expenses, losses, and gains for a set time period.
These accounts are closed at the end of each accounting period, and the balances are moved to the profit and loss account to calculate the net profit or loss. It contains all transactions that occur in a single financial year. Furthermore, it resets to zero and begins again at the start of the next financial year.
Nominal accounts include sales earnings, rent, and utility expenses.
2. Personal Account
Personal accounts are used to record transactions involving individuals, businesses, and companies. Personal account journal entries include those for individual customers or creditors, corporations or institutions, and outstanding expenses or revenue.
Personal Account is divided into three subcategories.
- Artificial personal account: An artificial personal account depicts bodies that are not human being but operate as separate legal entities under the law. Such as – Government agencies, hospitals,banks, business, cooperative and partnership.
- Natural personal account: Accounts which relate to individuals such as , capital account , creditors,and bebtors.
- Representative’s personal account: These accounts reflects a specific individual or group of people. The transaction in this type of account are either from previous or upcomming year.
3. Real Account
Real accounts, known as permanent accounts, include asset, liability, and equity accounts. These appear on the balance sheet and carry forward their balances from one accounting period to the next.
Such as – cash, inventory, property, equipment, and accounts payable. In contrast to nominal accounts, real accounts do not close at the conclusion of the accounting period.
Real Account give a continual record of the company’s financial situation. They provide information about the management of long-term assets and liabilities.
Three(3) Golden Rules of Accounting
Rule:1 Debit expenses and losses, credit Income and gains
This golden accounting rule applies to nominal accounts. Accurate documention of financial performance is essential for determining a company’s profitability and longevity.
This rule assure that all expenses and loses are accounted for as debits,while all income and gains are recorded as credits.
This rule allows for the systematic documentation of all receipts and payments,that helps shareholders in making informed decision and strategic plannings.
Example
Assume your business earns ₹10,000 from providing consulting services. Here, the income from consulting services is recorded as a credit, and the cash received is recorded as a debit.
Date | Account | Debit ₹ | Credit ₹ |
04 August 2025 | Cash/Bank | Rs.10,000 | |
Consulting services revenue | Rs.10,000 |
Rule:2 Debit the receiver, credit the giver
This rule related to personal accounts and govern the recording of transactions involving the exchange of value between entities. It ensures that every financial exchange of value between two entities is accurately recorded and transferred from one entity to another.
The important thing to know here is that if a company receive something,it must be debited the relevant account, if it give something it must credit the relevant account.
Example
Imagine you pays Rs.35,000 to suppliers. In this transaction, the supplier is the reciver and business is the giver.
Date | Account | Debit | Credit |
04 August 2025 | Supplier | 35,000 | |
Cash/Bank | 35,000 |
Rule:3 Debit what comes in, credit what goes out
This rule is related to real account, Debit what comes in and credit what goes out.
It assure that all resources inflows and outflows are recognised and accounted for in accounting records, offering a systematic and organized method for recording asset and liability transactions.
This rule helps in the clear presentation of asset purchase and disposal. The logic of this rule is that ,when an asset is acquired,it should be debited to account for its value inflow ,and when it is sold ,it should be credited for its value outflow.
Example
Suppose your company purchases a new computer for Rs 50,000. In this case, the computer is an asset that comes in, and the cash that is used to pay for the computer, is that goes out. Hence, you need to debit the Computer Equipment account and credit the Cash/Bank account.
Date | Account | Debit ₹ | Credit ₹ |
04 August 2025 | Computer | 50,000 | |
Cash/Bank | 50,000 |
Examples That Focus on All 3 Golden Rules
Assume Spl marbles starts its business with a capital of Rs. 4,00,000.
It rents out property valued Rs. 100,000.
The corporation purchases items worth Rs.2,00,000 from Durga Stone Works on credit.
It sells products for Rs.3,00,000.
Then, it pays Durga Stone Works in cash for the purchased products.
Furthermore, the company pays Rs.2,00,000 in salaries to its employees.
Transactions | Involved Accounts | Accouns Type |
Initial capital of Rs.4,00,000 | Capital Account, Cash Account | Personal Account, Real Account |
Rent worth Rs.1,00,000 | Cash Account, Rent Account | Real Account, Nominal Account |
Purchase of goods Rs.2,00,000 | Durga Marbles, Purchase Account | Personal Account, Nominal Account |
Sale of goods worth Rs.3,00,000 | Sales Account , Cash Account | Nominal Account, Real Account |
Cash payment to Durga marbles for goods purchased | Cash Account, Durga Marbles Account | Real Account, Personal Account |
Salary payment to employee worth Rs.2,00,000 | Cash Account, Salary Account | Real Account, Nominal Account |
Benefits of Golden Rules of Accounting
The three golden rules of accounting are the foundation of any company that , ensures financial integrity and openness. These rules ensure that all financial transactions are regularly and precisely recorded, resulting in error-free bookkeeping and more reliable financial reporting.
Benefits of golden rules of accounting are –
Transparency in Financial Statement
These rules helps business to keep their financial statements in a transparent manner, allowing them to be easily understood by all users and exposed to auditing without concern of inaccuracy or misstatement.
Proper Maintenance of Business Records
Maintaining proper records is important for a company’s success. This will ensure that the company’s records are stored in a secure and organized manner.
Informed Decision Making
Accurate financial records based on these rules helps,in decision-making by providing reliable facts on the health of the business. These rules aim to reduce errors in financial reporting, ensuring that all transactions are accurately documented and classified.
Helps in Budgeting
A balanced budget based on proper accounting standards can serve as a solid basis for corporate growth. In addition, it helps in more accurate future estimates.
Compare Financial Results
The golden rules ensure that financial data are accurately kept. Businesses can now easily and efficiently compare their year-over-year financial outcomes.
FAQ
What are ledger books ?
Ledger books are records of important information that is required to create financial statements.
How do you apply the golden rules of accounting?
First identity the type of account from personal, nominal,and real account involved in the transaction.
Then apply the golden rules of accounting.
First classify first whether the type of account involved in the transaction is a personal, real, or nominal account. Then apply the golden rules of accounting