Golden Rules of Accounting are foundational principles used in the Traditional Accounting System to determine how to record business transactions using debit and credit entries. These rules are based on the types of accounts: Personal, Real, and Nominal. Each type has a specific rule that guides whether an account should be debited or credited in a journal entry.
1. Personal Account
Rule: Debit the receiver, Credit the giver
Explanation:
Personal accounts are related to individuals, firms, companies, or institutions. This rule means that when someone receives something from the business, they are debited, and when someone gives something to the business, they are credited.
Examples:
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Paid ₹5,000 to Mohan:
→ Mohan (Receiver) is debited
→ Cash (Giver) is credited
Journal Entry:
Mohan A/c Dr. ₹5,000
To Cash A/c ₹5,000 -
Received ₹8,000 from Rahul:
→ Rahul (Giver) is credited
→ Cash (Receiver) is debited
Journal Entry:
Cash A/c Dr. ₹8,000
To Rahul A/c ₹8,000
2. Real Account
Rule: Debit what comes in, Credit what goes out
Explanation:
Real accounts are related to assets or properties—both tangible (like cash, furniture) and intangible (like goodwill, patents). This rule means when an asset comes into the business, it is debited, and when an asset goes out, it is credited.
Examples:
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Purchased furniture for ₹10,000 in cash:
→ Furniture comes in → Debit
→ Cash goes out → Credit
Journal Entry:
Furniture A/c Dr. ₹10,000
To Cash A/c ₹10,000 -
Sold a machine for ₹25,000:
→ Machine goes out → Credit
→ Cash comes in → Debit
Journal Entry:
Cash A/c Dr. ₹25,000
To Machinery A/c ₹25,000
3. Nominal Account
Rule: Debit all expenses and losses, Credit all incomes and gains
Explanation:
Nominal accounts deal with expenses, losses, incomes, and gains. This rule implies that all business expenses and losses are debited, while all incomes and gains are credited.
Examples:
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Paid ₹2,000 as salary:
→ Salary is an expense → Debit
→ Cash is going out → Credit
Journal Entry:
Salary A/c Dr. ₹2,000
To Cash A/c ₹2,000 -
Received ₹3,000 as commission:
→ Commission is an income → Credit
→ Cash is coming in → Debit
Journal Entry:
Cash A/c Dr. ₹3,000
To Commission Received A/c ₹3,000
Quick Summary Table: Golden Rules
Type of Account | Golden Rule | Examples |
---|---|---|
Personal Account | Debit the receiver, Credit the giver | Payment to supplier, receipt from customer |
Real Account | Debit what comes in, Credit what goes out | Purchase of assets, sale of machinery |
Nominal Account | Debit all expenses/losses, Credit all incomes/gains | Payment of rent, receiving interest |
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Foundation of Journal Entries:
Helps in accurate and systematic recording of transactions in the books of accounts.
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Easy to Learn and Apply:
Simple rules based on the nature of the accounts make them practical for beginners.
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Ensures Accuracy:
Maintains the balance of the accounting equation (Assets = Liabilities + Equity).
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Facilitates Auditing and Reporting:
Provides clarity and consistency, which helps auditors and accountants in verification and reporting.