3 Golden Rules of Accounting

What are three (3) golden rules of accounting?

The Three (3) Golden Rules of accounting are as follows

  1. Debit the Receiver, Credit the Giver
  2. Debit what Comes In and Credits what Goes Out
  3. Debit all expenses and Losses and Credit all Income and Gains.

Today I am going to describe the 3 golden rules of accounting. For a beginner, I know how much golden rules of accounting matters, so I will try to make it much easier for you as much as I can.

Understanding these rules is not much difficult task, it just requires someone who can teach it properly and the mental exercise of one who is understanding it. That means you. Before starting what are the three (3) golden rules of Accounting, you should know why we need them?

Why do we need the golden rules of accounting?

Journal Entries cannot be recorded without some rules. The rules for recording journal entries are referred to as the golden rules of accounting. Therefore we need these golden rules of accounting to record journal entry without which the accounting is incomplete.

Before knowing the golden rules of accounting, you need to know that there are three types of accounts in accounting which are or for which we will study ahead.

So, as I have mentioned that there are three types of Account which are

  1. Personal Account.
  2. Real Account.
  3. Nominal account.

In addition to these three accounts, there are also 3 golden rules of accounting and you know what each golden rule is associated with separate accounts.

Thus we have 3 rules for 3 types of accounts or we can say 1 rule for 1 type of account.

Now let’s study each of these accounts and rules associated with them.

Personal Account:

A personal account is an account that relates to the person, organization, etc. Thus any account which represents a person, organization, etc. comes under a personal account. Here are a few examples of personal accounts.

First is a Capital account: Capital represents the owner of the firm and an owner is a person, therefore Capital account comes under personal account.

Second is Curry Ltd’s account: Curry Ltd Account represents an organization and any account that represents an organization comes under a personal account.

Third is a Bank account: A bank is an organization, thus it also comes under a personal account.

Fourth is Peter’s account: Peter is a person and all accounts which represent a person comes under a personal account.

So, the fact is any account that represents a person, organization, etc. comes under a personal account.

I hope now you got the meaning of a Personal account.

So now let’s see what is the golden rules of Accounting? In the case of a personal account, the Golden Rule of Accounting is

Debit the Receiver, Credit the Giver.

Which means debiting the person who receives from the business and crediting the person who gives into the business.

Now let’s study these rules in detail.

Debit the Receiver: It means debiting the person or organization who has received something from the business. It could be any person such as owner, creditor, debtor, dealer, supplier, customer, etc. it results in a decrease in the company’s resources.

Let’s study an example to make it clearer. Cash paid to Peter. Here in this transaction, we have 2 accounts i.e. Cash account and Peter’s account. The cash account is a Real account for which we will study after the personal account and Peter’s account is a personal account as Peter is a person. So, as we are talking about personal accounts, therefore we will see whether Peter’s account will be debited or credited.

Let’s look at the example again, Cash paid to Peter. Here, in this transaction Peter is receiving cash from the Business, therefore considering the rule Debit the Receiver, Peter’s account is to be debited as Peter has received cash from the Business and the rule is to debit the Receiver.

Now let’s move to

Credit the giver: It means crediting the person/organization which has given something into the business. It results in an increase in a firm’s resources.

Let’s study an example to make it clearer. Cash received from Curry Ltd. Here, in this transaction, we have 2 accounts i.e. Cash account and Curry Limited account. The cash account is a Real account and Curry Ltd.’s account is a Personal account as it is an organization. So, as we are talking about a personal account, we will see whether Curry’s Limited account will be debited or credited.

Let’s look at the example again. It is, Cash received from Curry Ltd. So, here Curry Ltd. is giving cash into the business, therefore Curry Limited account will be credited considering the rule Credit the Giver and Curry Limited has given cash into the business.

I hope you got the golden rules of accounting in case of a personal account.

Real Account:

A real account is an account that represents an asset or which is related to assets. If you don’t know what an asset is then let me tell. An asset can be anything of economic value owned by an individual or organization and which can be converted into cash. Thus anything which can be converted into cash can be termed as an asset.

So, here are a few examples of Real account i.e. Cash account, Stock account, machinery account, Furniture account, etc. Because all these things such as cash, stock, machinery, furniture, etc. are assets. So, the fact is any account that represents assets comes under the real account.

Now, let’s study what is the golden rule of Accounting in case of Real account.

It is Debit what Comes In and credits what goes out.

Debit what Comes In: Debit what comes in means debiting the assets coming into the business as a real account is linked with assets. 

Now let’s look at the example of Debit what comes in.

An example is a Cash received from Peter. Here in this transaction, we have two accounts i.e. cash account and Peter’s account. The cash account is a real account as cash is an asset and Peter’s account is a personal account as Peter is a person. As we are talking about real accounts thus we will see whether the Cash account will be debited or credited.

Let’s look at the example again. It is, Cash received from Peter. Here Cash is coming into the business, therefore Cash account will be debited, considering the rule debit what comes in and Cash is coming into the business. I hope you got it.

Let’s move to

Credit what goes out: Credit what goes out means crediting the assets which are going out from the business.

It could be an asset such as cash, machinery, furniture, etc. Now let’s look at an example of Credit what goes out. Machinery sold to Peter. Here in this transaction, we have to accounts i.e. Machinery account and peter’s account. Machinery account is a Real account as Machinery is an asset and Peter’s account is a personal account as Peter is a person.

So, what we are studying now, we are studying the Golden rules of Accounting in the case of a Real account. So, we will have to see whether the Machinery account will be debited or credited. Let’s look at the example again. It is, Machinery sold to Peter. Here machinery is going out of the business as we have sold it.

Therefore, the Machinery account will be credited considering the rule in case of Real account Credit what Goes Out and Machinery is going out from the business.

Now, I hope you got the Golden Rules of accounting, both in the case of Personal and Real account.

Nominal Account:

A nominal account is an account that is related to all expenses, losses, income, gains, etc. Here are just a few examples of the Nominal Account. Salary account (salary is an expense) Income received account (income received is an income therefore it comes under nominal account), Loss on sale of assets account, etc. (It is a loss for the company, therefore, it comes under nominal account) so, any account which represents expenses, losses, income, gains, etc. comes under the nominal account.

Let’s study what is the golden rules of accounting in case of Nominal account.

It is Debit all expenses and Losses and Credit all Income and Gains.

First, we will study

Debit all expenses and losses: It means debiting all expenses and losses incurred by the business.

Let’s study an example of debit all expenses and losses to make it more clear for you. Salary paid in Cash. In this transaction, we have two accounts i.e. salary account and Cash account. The salary account is a nominal account because the salary is an expense as I have mentioned before and the Cash account is a Real account as Cash is an asset.

Now, as we are talking about the Nominal account, we will see whether the Salary account which is a nominal account will be debited or credited. Here, in this transaction, the salary account will be debited on the basis of the debit rule for all expenses and losses and the salary paid is an expense.

Let’s move to

Credit all Income and Gains: Credit all Income and Gains means Crediting all Income and Gains earned by the business. Let’s see an example of how to make it clearer.

An example is, interest Received from a bank. Here in this transaction, we have 2 accounts, i.e. Interest Received account and cash account. Interest received account is Nominal account and Cash account is Real account. Now as we are talking about the Nominal account, we will see whether the Interest received account will be debited or credited. Here, the interest received account will be credited considering the rule credit all income and Gains and Interest received is an income for the Business Organization.

Now, I hope I have made accounting a little easier for you. I have tried my best to make it easier for you. Now, you are clear about the 3 Golden Rules of Accounting.

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