Book-keeping and accounting should not be confused as one. Book-keeping is a part of accounting which involves recording of business transactions where accounting is a broader term used to entire accounting system.
The Three Golden Rules of accounting are:
- Personal Accounts: Debit the receiver, credit the giver.
- Real Accounts: Debit what comes in, credit what goes out.
- Nominal Accounts: Debit expenses and losses, credit gains and incomes.
Table of Contents
- What are the Golden Rules of Accounting?
- Classification of accounts
- Traditional Approach
- Modern Approach
- Rules for Debit and Credit
- Golden Rule of Accounting or Golden Rule of Debit and Credit under Traditional Approach
- Rule of Debit and Credit under Modern Approach
- Table showing the accounts to be Debited/ Credited under Traditional & Modern approach
- Analysis of Transactions According to Traditional & Modern Approach
- Basic Accounting Terms
- What is Journal?
- Steps involved in Journalising
Points To Remember
| Golden Rules | This rules helps in guiding principles for recording transactions accurately. |
| Accounts Classification |
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| Golden Rules for Debit and Credit in Traditional Approach |
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| Golden Rules for Debit and Credit in Modern Approach |
|
What are the Golden Rules of Accounting?
The golden rules of accounting are principles that helps to guide in recording of financial transactions.
The rules ensure consistency and accuracy in recording transactions, and helps to maintain the fundamental accounting equation. The rules can be better understood from the type of accounts under different approaches.
Classification of accounts
There are two approaches for the classification of accounts:
- Traditional Approach
- Modern Approach
Traditional Approach
The classification of traditional approach are:
- Personal Accounts: Account head which are pertaining to persons, firms, companies, organizations etc. are called personal accounts. Personal accounts are further classified into following categories:
- Natural Personal Accounts: Recording the transactions of individual human beings fall into the category of natural persons accounts. For Example: accounts of Jayant, Rajveer, Suresh etc.
- Artificial Personal Accounts: Recording the transactions concerning a firm, company, institution, organizations etc. fall into the category of artificial personal accounts.
- Representative Personal A/c: Representative Personal accounts are the accounts which represent a certain person or a group of person although the name of the concerned person or persons are not mentioned in the accounts head. Such type of account head occurs in cases of outstanding expenses, prepaid expenses, income received in advance etc. For example: Wages outstanding, Outstanding salary, Commission received etc.
- Impersonal Accounts: Impersonal accounts are divided into two category:
- Real Accounts: Recording transactions relating to tangible things such as goods, cash, land, building, machinery etc. are classified as real accounts.
- Nominal Accounts: Recording transactions relating to losses, expenses, incomes and gains are classified as nominal accounts.
Modern Approach
Modern approach accounts are classified into five category:
Rules for Debit and Credit
As there are two approaches for classification of accounts heads, the rules applicable for debit and credit also different.
- Golden Rule of Accounting or Golden Rule of Debit and Credit under Traditional Approach
- Rule of Debit and Credit under Modern Approach
Golden Rule of Accounting or Golden Rule of Debit and Credit under Traditional Approach
The rules for debit and credit under traditional approach are termed as golden Rules of Debit and Credit. The Rules are:
| Accounts Type | Golden Rule |
| Personal Accounts |
Debit - The receiver of the benefit Credit - The giver of the benefit |
| Real Accounts |
Debit - What comes in Credit - What goes out |
| Nominal Accounts |
Debit - Expenses and Losses Credit - Gains and Incomes |
Rule of Debit and Credit under Modern Approach
The rules for Debit and Credit applicable under Modern Approach are:
| Accounts Type | Rule |
| Assets Accounts |
When there is an increase in the asset, it is "Debited". When there is a decrease in the asset, it is "Credited". |
| Liabilities Accounts |
When there is an increase in the liability, it is "Credited". When there is a decrease in the liability, it is "Debited". |
| Capital Accounts |
When there is an increase in the capital, it is "Credited". When there is a decrease in the capital, it is "Debited". |
| Revenue Accounts |
When there is an increase in the revenue, it is "Credited". When there is a decrease in the revenue, it is "Debited". |
| Expenses Accounts |
When there is an increase in the expense, it is "Debited". When there is a decrease in the expense, it is "Credited". |
Table showing the accounts to be Debited/ Credited under Traditional & Modern approach
| Account Head | American Approach/ Modern Approach | English Approach/ Traditional Approach | Debit / Credit |
| (A) Increase in the balance of account | |||
| Rent Received | Revenue a/c | Nominal a/c | Credit |
| Motor Vehicles a/c | Asset a/c | Real a/c | Debit |
| Proprietor's a/c | Capital a/c | Personal a/c | Credit |
| Suresh (Debtor) | Asset a/c | Personal a/c | Debit |
| Jayant (Creditor) | Liability a/c | Personal a/c | Credit |
| (B) Decrease in the balance of account | |||
| Wages Paid | Expenses a/c | Nominal a/c | Credit |
| Proprietor's a/c | Capital a/c | Personal a/c | Debit |
| Furniture a/c | Asset a/c | Real a/c | Credit |
| Ranjan (Creditor) | Liability a/c | Personal a/c | Debit |
| Anand (Debtor) | Asset a/c | Personal a/c | Credit |
Analysis of Transactions According to Traditional & Modern Approach
| Transactions | Accounts Affected | Classes of accounts Under Traditional Approach | Reason Under Traditional Approach | Classes of accounts Under Modern Approach | Reason Under Modern Approach |
| Pulkit started business |
Cash Capital |
Real Personal |
Comes in Giver |
Asset Capital |
Increased Increased |
| Purchase Machinery in cash |
Machinery Cash |
Real Real |
Comes in Goes out |
Asset Asset |
Increased Decreased |
| Purchase Goods From Madhab |
Purchase Madhab |
Nominal Personal |
Expense Giver |
Expense Liability |
Increased Increased |
| Sale goods for cash |
Cash Sales |
Real Nominal |
Comes in Income |
Asset Revenue |
Increased Increased |
| Deposit cash into Bank |
Bank Cash |
Personal Real |
Receiver Goes Out |
Asset Asset |
Increased Decreased |
| Withdrawn from Bank for office use |
Cash Bank |
Real Personal |
Comes in Giver |
Asset Asset |
Increased Decreased |
Basic Accounting Terms
| Basic Terms | Meaning |
| Proprietor | Proprietor is the individual or group of persons who own a business. |
| Entity | Entity is used to mean an organization which has a different identity from its member. |
| Capital | The amount which is brought in a business enterprise by the proprietor or investor for carrying on the business is called capital. |
| Drawings | The amount of cash or value of good withdrawn by the owner from the business for personal use is called drawings. |
| Asset | Anything which is the property of business enterprise is called an asset. |
| Liability | The amount which the firm is required to pay in future is called liability. |
| Expenses | Expense is the cost incurred in producing and selling the goods & services. |
| Income | Excess of revenue over expenses is called income. |
| Expenditure | Any payment of cash or transfer of property or incurring a liability for the purpose of acquiring assets, goods or services is called expenditure. |
| Debtors | Debtors are the persons or firm from whom the payment is to be received by the business. |
| Creditors | Creditors are the person or firm to whom some money is still owing by the business. |
| Revenue | Revenue in accounting means the income of regular nature from any source. It consists of the amount received from sale of goods. |
| Purchase Returns or Returns Outward | When goods purchased earlier are returned by the business to the supplier for some reason these are known as purchase returns or returns outward. |
| Sales Returns or Returns Inward | When goods sold earlier are returned to the business by the customer for some reasons these are known as the sales returns or returns inward. |
| Stock or Inventory | Goods purchased by business in a particular period are generally not sold during that year. The value of those goods which remain unsold is known as stock or inventory. |
What is Journal?
Journal is a book of original entry in which transactions are recorded in chronological order from source documents showing the accounts to be debited and credited in a systematic manner.
Steps involved in Journalising
There are three steps involved in the process of journalising a transaction.
Step 1 : Identification of accounts or 'accounts heads' affected by the transaction.
Step 2 : Classification of accounts or accounts heads.
Step 3 : Application of Rules for Debit or Credit.
Illustration : On 03-04-2024, Anil purchased furniture for Cash Rs. 20,000.
Solution :
| Date | Particulars |
L. F. |
Dr. Amount |
Cr. Amount |
|
2024 03 Apr |
Furniture A/c....................Dr. To Cash (Being furniture purchased in cash) |
20,000 |
20,000 |
Explanation :
Step 1 : Identification of accounts or 'accounts heads' affected by the transaction
In this transaction, the business has paid cash for purchase of furniture. Therefore, the two accounts involved are 'Furniture A/c' and 'Cash A/c'.
Step 2 : Classification of accounts or accounts heads
According to Traditional classification or Golden Rule of Debit and Credit, Furniture A/c' is a Real Account and 'Cash A/c' is also a Real Account.
According to Modern classification, 'Furniture A/c' is a Asset Account and 'Cash A/c' is also a Asset Account.
Step 3 : Application of Rules for Debit or Credit -
According to Traditional classification : Furniture being asset comes in the business so, 'Furniture A/c' will be debited and as cash goes out 'Cash A/c' will be credited.
According to Modern classification : As asset increases because Furniture has been brought, "Furniture A/c' will be debited and as the asset in the form of cash decreases because cash has been paid, 'Cash A/c' will be credited.
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