One of the most famous and commonly used terms in the field of accounting and finance is “Three golden rules of accounting”.
Every entity has to follow the Double entry accounting system while maintaining its books of accounts which is very complicated process.
These Golden rules of Accounting are designed to simplify this complex process of book keeping & can be applied very easily.
Also known as traditional rules , these rules form the very basis of accounting & bookkeeping.
TYPES OF ACCOUNTS
In order to understand these rules, first we need to know the types of accounts . Basically, there are 3 main types of accounts , namely :-
- REAL ACCOUNT – The real accounts are the balance sheet accounts such as the accounts for recording assets, liabilities, and the owner’s (or stockholders’) equity. For example, Bank account.
- NOMINAL ACCOUNT – These accounts relate to income, expense and gains or losses of a business concern. For example, salaries account.
- PERSONAL ACCOUNT – Ledger accounts that contain transactions related to individuals or other organizations with whom your business has direct transactions are known as personal accounts. For example, Ram’s account.
GOLDEN RULES OF ACCOUNTING:-
Accounting golden rules of debiting and crediting are designed according to above three basic accounts:
- FOR REAL ACCOUNT :-
“Debit what comes in , Credit what goes out. “
If the item (real account) is coming into the business then – Debit
If the item (real account) is going out of the business then – Credit
For example –
A deposits Rs 10,000 in the Bank.
In this case, the two accounts involved are Bank A/c and Cash A/c and both are real accounts as well.
Applying the above rule for rule account, the journal entry to be passed is :-
Bank A/c (DEBIT ) Rs 10,000
To Cash A/c (CREDIT ) Rs 10,000 (Debit what comes in, credit what goes out )
- FOR NOMINAL ACCOUNT :-
“Debit all expenses and losses, Credit all incomes and gains .”
If it is an expense or loss for the business – Debit
If it is an income or gain for the business – Credit
Goods sold worth Rs 5,000 to Mr X.
In this case, the two accounts involved are Sales A/c which is a Nominal account & Mr. X A/c Which is personal account.
Hence, applying the above rule , the journal entry to be passed will be:
Mr. X A/c (DEBIT ) Rs 5,000
To Sales A/c (CREDIT ) Rs 5,000 (Credit all incomes & gains )
- FOR PERSONAL ACCOUNT :-
“Debit the receiver, Credit the giver .”
If the person(or)legal body(or)group is receiving something – Debit
If the person(or)legal body(or)group is giving something – Credit
Purchased goods worth Rs 20,000 from Mr Safal Ltd.
Here, the two accounts involved are Purchase A/c which is a nominal account & Mr. Safal Ltd. A/c which is a Personal A/c.
Hence applying the rule of personal account , the journal entry to be passed is:-
Purchase A/c (DEBIT ) Rs 20,000
To Mr. Safal Ltd. Ac (CREDIT) Rs 20,000 (Credit the giver )
All the business transactions must be recorded on the basis of these golden rules of accounting.