In the accounting field, especially in the finance section, we are taught to create and pass the journal entries in the books of accounts. One must have knowledge of basic accounting rules in order to maintain the transactional entries. There are three rules here which are known as the three golden rules of accounting, in short accounting golden rule.
The name of those rules may vary from country to country like – three golden rules of commerce, three golden rules of finance, and the golden rules of bookkeeping. In this article, I’ll try my best to explain those three golden rules of accountancy with examples and demonstrate usage of the rule.
What are the three golden rules of accounting?
Golden rules of accountancy are divided as Personal, Real, and Nominal accounts. This is the reason why we call it the three golden rules of accounting. Let’s understand the rules of each and every account in detail.
1. Personal Account
The personal account relates to persons with whom a business keeps dealings.
A person called be a natural person or a legal person. If a person receives anything from the business, he is called a receiver and his account is debited in the books of the business. If a person gives anything to the business, he is called a giver and his account is to be credited in the books of the business.
The Golden Rule for Personal Account is,
Debit the Receiver and Credit the GiverThree Golden Rule of Accounting: Personal Account
2. Real Account
The real account relates to property which may either come into the business or go from the business.
If any property or goods come into the business, the account of that property or goods is to be debited in the books of the business. If any property or goods goes out from the business account of that property or goods are to be credited in the books of business.
The Golden Rule for Real Account is,
Debit What Comes In and Credit What Goes OutThree Golden Rule of Accounting: Real Account
3. Nominal Account
The nominal account is an account that relates to business expenses, loss, income, and gains.
If the business incurs expense to manage and run business, the account of that expense is to be debited in the books of business. When a business earns income by rendering services or hiring business assets, an account of that income is to credited in the books of business.
On the other hand, if in the case of the transaction of a sale or purchase of goods or assets, if any loss is incurred by the business, the account of that loss is to debited in the books of assets. If in the transaction of sale or purchase of goods or assets any profit is earned by the business, then the account of that profit is to be credited in the books of business.
The Golden Rule for Nominal Account is,
Debit All Expenses and Losses and Credit all Incomes and GainsThree Golden Rule of Accounting: Nominal Account
Example 2: Received 100 bucks as interest on our fixed deposit, here interest which is received is business income and therefore it is to be credited in the books of business.
Related Reads in Book of Accounts:
The above all are the three golden rules of accounting.