Golden Rules of Accounting: Full Explanation, Usages, Function and Types

Golden rules of accounting

There are 3 types of golden rules of accounting for the treatment of all the transaction conducted in any business.

The first Golden rules of accounting is:-

Debit the Receiver,

Credit the Giver

The second Golden rules of accounting:-

Debit what comes in,

Credit what goes out

The third Golden rules of accounting:-

Debit all expenses and losses

Credit all income and gains

Understanding golden rules of accounting

To understand these golden rules of accounting, you must have to understand the types of accounts because the rules of accounting apply with this account types for performing all the transactions without any error.

Types of account

In golden rules of accounting there are three types of accounts

Personal
Real
Nominal

Personal Account

A personal account represent to an individual’s like natural person, company, firm group of persons, associations.

Some example of personal account

Nehal account, Jiya account, abc industries ltd, creditors account, debtors account, pansari and sons, etc.

Real Account

A Real Account represent all the assets and liabilities other than people accounts. These Account are not closed at the end of the year, this account are carried forword

Some example of Real Account

Bank Account, Land & building Account, Furniture Account, investment Account, Goodwill Account, etc.

Nominal Account

A Nominal Account Represent all the Income and Gains, Expense and losses.

Some example of Nominal Account

Interest Account, Expenses Account, Salary Account, etc.

As you have learn the golden rules of accounting and the three types of account in which the golden rules are use. Now, let understand which account is connected to which types of golden rules.

Golden rules of accounting with their Account

The golden rules of accounting connect with each of the three types of account

A Personal account include the account of person in following terms Debit the receiver and credit the giver.

A Real account include the assets in the following terms Debit what comes In and Credit what goes out.

A Nominal Account include all the income and gains, expenses and losses in the following terms Debit all expenses and losses, Credit all income and gains.

Modern Approach

According to the modern approach or modern rules of accounting are the golden rules of accounting can be classified into five categories – Assets, Liabilities, Capital, Income and Gains, Expenses and losses

Assets Account
Increase in Assets				Debit
Decrease in Assets				Credit
Liability Account
Increase in Liability		Credit
Decrease in Liability		Debit
Capital Account
Increase in Capital	Credit
Decrease in Capital	Debit
Revenue Account
Increase in Revenue		Credit
Decrease in Revenue		Debit
Expenses Account
Increase in Expenses			Debit
Decrease in Expenses			Credit

Examples of Golden Rules of accounting

Let understand the golden rules of accounting with some practical Questions

1. Shyam Started a business of Rs. 50,000

Account types	Particular	Debit	Credit
Real A/c	Cash A/c ----------------------------------	50,000
Personal A/c	To Capital A/c		50,000

In this question,Cash is a Real account and Capital is a Personal account. The golden rules applied as shown in the table

2.Furniture is Purchased for cash Rs. 2,000

Account types	Particular	Debit	Credit
Real A/c	Furniture A/c -----------------------------	2,000
Real A/c	To Cash A/c		2,000

In this question,Furniture is a Real account and Cash is also a Personal account. The golden rules applied as shown in the table.

3.Sold Good to Puja for Cash Rs. 6,000

Account types	Particular	Debit	Credit
Real A/c	Cash A/c ----------------------------------	6,000
Nominal A/c	To Sales A/c		6,000

In this question,Cash is a Real account and Sales is a Nominal account. The golden rules applied as shown in the table

4.Paid to Suman Company ltd. Rs. 10,000

Account types	Particular	Debit	Credit
Personal A/c	Suman Company ltd. A/c ---------------	10,000
Real A/c	To Cash/Bank A/c		10,000

In this question, Suman company ltd. is a Personal account and Cash/Bank is a Real account. The golden rules applied as shown in the table

5.Paid to the Clerk, Salary Rs. 2,000

Account types	Particular	Debit	Credit
Nominal A/c	Salary A/c ---------------------------------	2,000
Real A/c	To Cash A/c		2,000

In this question, Salary is a Nominal account and Cash is a Real account. The golden rules applied as shown in the table

6.Receipt Rs. 200 As Interest

Account types	Particular	Debit	Credit
Real A/c	Cash A/c ----------------------------------	200
Nominal A/c	To Interest A/c		200

In this question,Cash is a Real account and Interest is a Nominal account. The golden rules applied as shown in the table

Conclusion

The Journal entries must be passed on the basis of the golden rules of accounting which will be summarized into ledger account. To carry out the transaction it must follow the golden rules of accounting that are

Debit the Receiver, Credit the Giver
Debit what comes in, Credit what goes out
Debit all expenses and Losses, Credit all Income and Gains

These form the foundation of accounting and hence are called golden rules of accounting. If someone does not know the proper rules of accounting then he will not able to pass the journal entries and also not able to create the correct account for the transaction.

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Golden Rules of Accounting: Full Explanation, Usages, Function and Types