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3 Golden Rules of Accounting

Life in general has some rules to live by. One of the most famous ones being ‘Treat others as you might want to be treated.’

Some other sectors have certain tips and tricks that will help do the job better. Like while investing, people try to follow the golden rule of ‘buy low, sell high.’ 

In the same way, accounting and managing the books of your business have 3 golden rules to swear by. While these are golden rules, they’re also a secret sauce that will help you remember the accounting parlance easily, at least in your mind. Accounting is a lot more than just bookkeeping. 

Accounting consists of rules popularly known as the Three Golden Rules of Accounting. These rules apply to all categories of the transaction. These three most talked about and basic Golden rules of accounting are to make debit and credit in accounting ledger by categorising each and every transaction. 

If you want to keep your books up-to-date and accurate, follow the three basic rules of accounting. And if you want to follow the correct methods of accounting, sign up on FloBiz to avail our cloud computing accounting software. That makes accounting easy for you and your business. 

So what are the 3 Golden Rules of Accounting? 

Wait. Before we dive right into the golden rules, some basic rules one needs to know is that the world of accounting relies on debit and credit. Without truly understanding what debit and credit stand for, the golden rules cannot be applied. 

Debits and credits are equal but opposite entries in your accounting books. Debit and Credits affect the following accounts:

1. Asset Accounts: Resources owned by a business that has economic value you can convert into cash (e.g., land, equipment, cash, vehicles, factory)
2. Liabilities Account: Amounts owed to another person or business or money that you have borrowed for the business(e.g., accounts payable, short and long term loans)
3. Income and Revenue Account: Cash earned from sales or other sources of income such as interest earned, dividend, etc.
3. Expense Account: Costs that occur during business operations either fixed or variable. (e.g., wages, supplies, cost of goods sold, raw materials)
5. Capital Account: These are the accounts of proprietors/partners who have invested an amount in the business. It includes both Capital Account and the Drawings Account. Your assets minus your liabilities.

Finally, the 3 Golden Rules are:

1. Debit what comes in and Credit what goes out
2. Debit the receiver, and Credit the giver
3. Debit expenses and losses, Credit income and gains

To understand the 3 golden rules, one also needs to know the different types of Accounts and what goes into what account. This classification of account is different from what is mentioned above as these classify the general types of the ledger.

These are:
A. Real Account: The assets and liabilities account mention above, which include factories, cash, land and liabilities such as loan, accounts payable are classified under the real account.
B. Personal Account: This includes all people, real or made up such as individual personal accounts, firms and associations.
C. Nominal Account: The income and losses account mentioned above will be included in the nominal account so transactions such as wages, salaries, cost of goods sold are all part of the nominal account. 

Tying it altogether 

Account TypeGolden Rule
Real Account Debit what comes in, Credit what goes out 
Personal Account Debit the Receiver, Credit the giver 
Nominal AccountDebit all expenses and losses, Credit all income and gains 

Golden Rules of Accounting Examples

Let’s take a few extremely simple examples and see in which accounts can the transactions be recorded.

1. Purchased furniture for INR 10,000 in cash
Accounts Involved: Debit/Credit Rule Applied
Furniture A/C 10,000 Real a/c – Dr. what comes in
        Cash A/C 10,000 Real a/c – Cr. what goes out

Because the transaction is cash bases, that’s are why both real accounts come in a dual concept. But if the same transaction is done on credit then the Cash account replaced with a Personal account.

2. Paid INR 18,000 as rent
Accounts Involved: Debit/Credit Rule Applied
Rent A/C 18,000 (Nominal a/c) – Dr. the expenses
        To Cash 18,000 (Real a/c) – Cr the Giver

3. Profit Gained INR10,000
Accounts Involved: Debit/Credit Rule Applied
Cash Debited With 10,000 (Real A/c)
      Profit Credited With 10,000 (Nominal A/c)

4. Paid INR 15,000 cash to Amazon
Accounts Involved: Debit/Credit Rule Applied
Amazon A/C 15,000 Personal a/c – Dr. the receiver
        To Cash A/C 15,000 Real a/c – Cr. what goes out

In the above transaction cash is a capital nature and balance sheet item so it will be treated under the Real account. Amazon relates to the financing item so treated with a Personal account.

5. Earn INR 6,000 as bank interest
Accounts Involved: Debit/Credit Rule Applied
Bank Account A/C 6,000 Nominal a/c – Dr. what comes in
        To Interest Received A/C 6,000 Real a/c – Cr. income or gain

FAQ’s on Golden Rules of Accounting

1. Are all transactions always covered under some type of account?
Yes. No matter how unique or different the transaction can be, they all can be categorised under some or the account.

2. Are the golden rules of accounting universal?
Yes. The golden rules of accounting are universal and can apply to almost most types of businesses and services. You should not have any problem integrating these rules into your accounting lifestyle.

3. Can one pass journal entries without knowing the golden rules?
Essentially, no. Knowing the golden rules of accounting is not only helpful but imperative to some extent. Since accounting follows a set of methods and procedures, the golden rules of accounting help in keeping the books of account accurate.

That’s all about the 3 golden rules of accounting one needs to know about. Let us know in the comments section below in case of any doubts or questions. 

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