Three golden rules of accounting with examples

Posted on

September 23, 2015

AtulHost

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.

Three Golden Rules of Accounting

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 Giver
Three Golden Rule of Accounting: Personal Account

Example: Goods worth 1000 bucks sold to Mr. Smith from Mr. John. In this transaction, Mr. Smith is the receiver of goods, he is called a receiver and his account is to be debited in the books of business. Mr. John is the giver of goods, he is called giver and his account is to be credited in the books of business.

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 Out
Three Golden Rule of Accounting: Real Account

Example: Goods sold on cash for 1500 bucks. In this transaction cash, an asset for business comes into the business on sales of goods, and therefore cash account is to be debited in the books of business. On the other side, goods, assets of business goes out of the business on sale and therefore goods account is to be credited in the books of business.

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 Gains
Three Golden Rule of Accounting: Nominal Account

Example 1: Paid 50 bucks as a commission to our agent, here commission which is paid to an agent is a business expense and it is to be debited in the books of business.

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.

87 responses to “Three golden rules of accounting with examples”

shalini

January 5, 2017

Sir what would be the entry for salary paid to kishan rs. 4000 and why?

Reply
1. AtulHost
  
  January 7, 2017
  Hi, Shalini, the entry for salary made would be like this…
  
  Salary A/c. ....Dr. To Cash A/c. ...Cr.
  
  Because salary is the expense that’s why it is debited and cash is going out so it is credited.
  Reply
2. shalini
  
  January 8, 2017
  
  Why don’t we debit Kishan’s A/c. since the receiver shall be debited?
  
  Reply
  1. AtulHost
    
    January 10, 2017
    
    Since you are making a payment as Salary when you pay for any purpose your need to make an entry in the form of account.
    
    Reply
Sameekshaa Jankar

February 6, 2017

All the expenses and losses come on the nominal side but why outstanding expenses come on the personal side?

Reply
1. AtulHost
  
  February 16, 2017
  
  Nominal accounts prefixed or suffixed with the terms outstanding, prepaid, or pre-received are personal accounts. Because Outstanding Expenses A/c is a personal account with a credit balance. The balance indicates the amount that is owed by the Organisation on account of unpaid expenditure.
  
  Reply
Ziya Saif

February 15, 2017

Hi Atul Sir, I have big problems with journal entries, sometimes I couldn’t understand which a/c should be debited and which should be credited. So, Please clear me.

Reply
1. AtulHost
  
  February 16, 2017
  
  Hi, Ziya, passing journal entries in books of account is somewhat difficult if you are not paying attention to three golden rules of account. However I have written an article on Journal Entries in Accounting: Basics, have a look and do some problem solving it will sure help.
  
  Reply
2. Badal
  
  December 14, 2017
  
  Hi Ziya, always remember in an easy way like –
  
  “Giver was Rich then it is always in Credit and Receiver was Poor then it is always in Debit”.
  
  Reply
Jeet

February 24, 2017

Simple and straight answers. Thanks, Atul.

Reply
1. AtulHost
  
  February 24, 2017
  
  You’re welcome Jeet. Stay tuned for more accounting updates.
  
  Reply
Eva Kiden

May 25, 2017

Hey Atul Kumar, Thanks very much for your time and effort on answering such questions. I have also something to ask:

1. From the three a/c rules, which one can be apply for Liabilities and Capital A/c.?
2. What is the difference between adjusted trial balance and unadjusted trial balance?
3. What are their advantages in accounting.

Regards,
Eva Jacks

Reply
1. AtulHost
  
  May 26, 2017
  
  Hi, Eva, thanks for your feedback and I am glad that you have shown interest in accounts. Below is the answer to all your queries.
  
  1. Liabilities are noted under Real A/c. and Capitals are noted under Personal A/c.
  Read more about Classification of Accounts here.
  
  2. The differences between an adjusted trial balance and an unadjusted trial balance are the amounts recorded as part of the adjusting entries. Adjusted trial balance is one where are the adjustments are taken into consideration and its final. Un-adjusted trial balance is in its intermediary state and there are adjustments to yet to be made to them.
  
  3. Trial balances give a snapshot of the state of the company at periodic intervals, such as monthly or quarterly, by looking at all entries in the company’s general ledger.
  
  I hope your all doubts are clear now.
  
  Reply
Poonam

September 6, 2017

Hello sir, Please clear me here – the (debit the receiver, credit the giver) rule for Personal A/c. Why we debited the receiver? For example: I paid Rs. 1000 to Ram. It means ram is reciver and Ram is debited by 1000. Since I gave the money, my account should be debited and vice versa. But double entry rule says opposite and it confuses me all time. Please help me.

Reply
1. AtulHost
  
  September 7, 2017
  
  Hello, Poonam, I can understand that account is not easy to start, we have to understand the whole process first. Let’s come to the point. Double-entry accounting is based on the fact that every financial transaction has equal and opposite effects in at least two different accounts. So each entry has to be recorded by maintaining the relations.
  
  Reply
Okunzuwa Sarah

May 4, 2018

Good afternoon sir, first of all thanks for making this simple to us. Please my question is what are the likely questions interviewer asked in term of accounting in bank for instance.

Reply
1. AtulHost
  
  May 5, 2018
  
  Thanks for the comment Okunzuwa Sarah. This seems to be career based question so I better answer in that way. You will be asked questions like payments, receipts, outstanding, taxes, bills of exchange and all. You’ll be asked any question that related to banking sector and based on real life transactions. Most bank uses accounting software here are some of them – CGram Software, Financial Force, Microsoft Accounting Professional, Microsoft Dynamics AX and Microsoft Small Business Financials.
  
  Reply
Sourav Biswas

May 22, 2018

Sir, Please tell me the entry of “Interest received from bank”. Here interest is a Nominal A/c and bank is Personal A/c.

Reply
1. AtulHost
  
  May 23, 2018
  It’s so simple Sourav,
  
  Bank A/c ............... Dr. To Interest Received ... A/c (Being Interest Received in Bank's Account)
  
  Explanations:
  
  – Bank A/c. comes under Personal A/c.; so the rule we applied here is “Credit The Giver”.
  – Interest Received A/c. comes under Nominal A/c.; so the rule is “Credit All the Incomes and Gains”.
  Reply
Sourav Biswas

May 23, 2018

Thanks sir but will be in credit leg?

Reply
1. AtulHost
  
  May 23, 2018
  
  Yes Sourav, Interest Receive will be on credit side.
  
  Reply
Sridhar Parida

November 29, 2018

Good morning sir, I have a doubt in a transaction i.e. trade discount allowed to customer on sale which account should be debited. Please give me answer.

Reply
1. AtulHost
  
  November 29, 2018
  
  First of all, trade discounts are not recorded in journals. You should use final net amount while making any entries.
  
  Reply