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 3 Golden rules of accounting are:-
Golden Rule of Accounting is that you must always keep records for all transactions in order to understand how much money you have earned and spent over time in any business or firm.
1. First rule
Credit the Giver
Credit what goes out
Credit all income and gains
Understanding golden rules of
accounting
To understand these 3 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 |
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|
Decrease in
Assets |
Credit |
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|
Liability Account |
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|
Increase in
Liability |
Credit |
|||
|
Decrease in
Liability |
Debit |
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|
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 |
|
Account types |
Particular |
Debit |
Credit |
|
Real A/c |
Furniture A/c ----------------------------- |
2,000 |
|
|
Real A/c |
To Cash A/c |
|
2,000 |
|
Account types |
Particular |
Debit |
Credit |
|
Real A/c |
Cash A/c ---------------------------------- |
6,000 |
|
|
Nominal A/c |
To Sales A/c |
|
6,000 |
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 |
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 |
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 |
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.