Golden Rules of Accounting is essential to grasp the basics of financial transactions. These rules form the foundation of double-entry bookkeeping, the very heart of accounting. In the double entry system of accounting each transaction has 2 entries: a debit entry and a credit entry. The crucial aspect of the system is what account to debit and what to credit.The double-entry system was invented in the 15th century by an Italian mathematician Luca Pacioli the Father of Accounting.
The Golden Rules guides in recording these transactions.
What Are the Golden Rules of Accounting?
The Golden Rules of Accounting are categorized based on the types of accounts:
Personal Account
- Natural Persons: Relates to individuals like Ramesh, Priya, etc.
- Artificial Persons: Relates to entities like ABC Pvt Ltd, SBI Bank
- Representative Personal: Represents a group of people or accounts (e.g., Outstanding Salary A/c).
Golden Rule: Debit the Receiver, Credit the Giver
Example Cash Paid to Raju Rs 1000
- Debit: Raju’s Account 1000
- Credit: Cash Account 1000
Impersonal Accounts
- Real Accounts: Related to assets (e.g., Cash A/c, Building A/c).
- Nominal Accounts: Related to income, expenses, gains, and losses (e.g., Rent A/c, Commission A/c)
Real Account
Accounts related to assets and properties owned by the business. These can be tangible (cash, furniture) or intangible (goodwill, patents).
Golden Rule:Debit What Comes In, Credit What Goes Out
Example : Cash paid Rs 20,000 for purchase of Computer
- Computer A/c – Debit ₹30,000 (comes in)
- Cash A/c – Credit ₹30,000 (goes out)
Nominal Account
Accounts that record expenses, losses, incomes, and gains. These accounts get reset to zero every financial year—hence the term nominal.
Golden Rule: Debit All Expenses and Losses, Credit All Incomes and Gains
Example: Rent paid ₹2,000 as rent.
Entry:
- Rent A/c – Debit ₹2,000 (Expense)
- Bank or Cash A/c – Credit ₹2,000
Why are the Golden Rules Important ?
These rules help you:
- Maintain accurate books of accounts
- Track profits and losses effectively
- Prepare financial statements that comply with standards
Key TakeAway
| Account Type | Rule | Keyword |
| Personal | Debit the receiver Credit the giver | People |
| Real | Debit what comes in Credit what goes out | Assets |
| Nominal | Debit expenses/losses Credit incomes/gains | Profit & Loss |
FAQs
The 3 types of accounts are Personal Account, Real Account and Nominal Account.
Is it a person or entity? Personal Account
Is it an asset? Real Account
Is it an expense, income, loss, or gain? Nominal Account
They help correctly apply the Golden Rules of Accounting, ensuring accurate and standardized financial entries.