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Golden Rules of Debit and Credit for Accounting

Updated on: 03 May, 2023 03:27 PM

Accounting today is much more than bookkeeping. Two important aspects of accounting are debit and credit. We must only enter a transaction after understanding the detailed meaning of which account should be debited or credited.

When a financial transaction takes place, it affects two accounts, and in the dual entry system of accounting, we have two columns for entering our transactions. As we all know, one is the debit side, and the other is the credit side. To understand an accounting entry, first, we need to understand the account types and their corresponding debit credit rule.

For a beginner in the accounting field, one must go through the tough choice of selecting the rule. Basically, accounting can be done following the
1- Universal, Traditional or British Approach of Debit/Credit
2- Modern or American approach

In the Traditional Approach, the key concept is to classify various accounts under two broad categories, i.e., Personal and Impersonal Accounts which we will discuss further in detail. Whereas, Modern Approach uses the Accounting Equation to classify different transactions.

The Three Golden Rules of Accounting – Real, Personal and Nominal Accounts

Traditional Approach consists of rules popularly known as the Three Golden Rules of Accounting. These rules are applicable irrespective of all categories of the transaction. These three most talked about, and basic Golden rules of accounting are to make debit and credit in the accounting ledger by categorizing every transaction or entry into either

  • Real
  • Personal or
  • Nominal Accounts

Now let us take each accounting rule in detail.



Real Account

Real Accounts are a set of tangible aspects of business like furniture, cash, etc. It contains transactions related to the assets and liabilities of the company. The asset category can be further subdivided into tangible and intangible assets.

  • If the item that belongs to the real account is coming into the business, then while making the accounting entries, it should be written on the Debit side.
  • If the item of real account is going out of business, then while making the accounting entries, it should be written on the Credit side.
The accounting rule of a real account goes like
“Debit what comes in,
credit what goes out”

Personal Accounts

  • Personal accounts can be considered as a general ledger that relates to people, associations, and companies.
  • If the person/ group of persons/ legal body is receiving something from the business, then – Debit the receiver
  • If the person/ group of persons/ legal body is paying something to the business – Credit the payer or giver
The accounting rule of the personal account goes like
“Debit the receiver,
Credit the giver”

Nominal Accounts

Nominal Accounts represents all the transactions of business like Expenses, Loses, Income and gains incurred while doing business. Some common e.g., are,

  • Electricity Expenses,
  • Telephone Expenses,
  • Interest Received,
  • Profit on the Sale of Machines, etc.

If it’s an expense or loss for the business – Debit
If it’s an income or gain for the business – credit

The accounting rule of the nominal account goes like
“Debit all expenses and losses,
credit all incomes and gains”

To summarize, the three Golden Accounting Rules or three rules of accounting can be better understood as

Rules For Accounting Real Accounts Personal Accounts Nominal Accounts
Debit What comes in The Receiver Expenses and Losses
Credit What goes out The Giver Incomes and Gains

Examples

The above three golden rules can be better decoded with the help of some illustrative accounting transactions like

  • Goods amounted to Rs. 15000 purchased from Mr. Mohan on Credit
  • Cash paid to Mr. Mohan for credit purchases
  • Goods sold to Mr. Rehman for Rs. 20000
  • Rs. 10000 withdrawn from the bank
  • The machinery of Rs. 50000 purchased from M/s Bharti Traders and paid Rs. 25000 in cash and remaining to be paid on the future date.
  • The balance amount of Rs. 25000 to M/s Bharti Traders is paid in full
  • Machinery is sold to John for Rs. 55000.
Transactions Accounts Involved Types of Accounts
Goods Purchased from Mr. Mohan on Credit Mr. Mohan Inventory (Stock) Personal Account Real Account
Cash paid to Mr. Mohan Mr. Mohan Cash Personal Account Real Account
Goods sold to Mr. Rehman Bank Inventory (Stock) Real Account Real Account
Cash withdrawn from Bank Cash Bank Real Account Real Account
Machinery Purchased from M/s Bharti Traders M/s Bharti TraderMachineryBank Personal AccountReal AccountReal Account
Cash paid to M/s Bharti Traders M/s Bharti TraderCash Personal AccountReal Account
Machinery Sold to John at a Profit JohnMachineryGain on sale of Machine Personal AccountReal AccountNominal Account

Let’s apply the golden rules to each of these transactions to formulate a Journal Entry:

Goods amounted to Rs. 15000 purchased from Mr. Mohan on Credit

The Golden rule for Real and Personal Accounts:

  • a) Debit what comes in
  • b) Credit the giver

The Journal entry will be:

Inventory A/c Dr. 15000
To Mr. Mohan 15000

Cash paid to Mr. Mohan for credit purchases

The Golden rule for Real and Personal Accounts:

  • a) Debit the receiver
  • b) Credit what goes out

The Journal entry will be:

Mr. Mohan Dr. 15000
To Cash A/c 15000

Goods sold to Mr. Rehman for Rs. 20000 in cash

The Golden rule for Real and Real Accounts:

  • a) Debit what comes in
  • b) Credit what Goes out

The Journal entry will be:

Bank A/c Dr. 20000
To Inventory 20000

Rs. 10000 withdrawn from the bank

The Golden rule for Real Accounts:

  • a) Debit what comes in
  • b) Credit what goes out

The Journal entry will be:

Cash A/c Dr. 10000
To Bank A/c 10000

Machinery of Rs. 50000 purchased from M/s Bharti Traders and paid Rs. 25000 in cash and remaining to be paid on the future date.

The Golden rule for Real and Personal Accounts:

  • a) Debit what comes in
  • b) Credit the giver
  • c) Credit what goes Out

The Journal entry will be:

Machinery A/c Dr. 50000
To M/s Bharti Traders 25000
To Bank A/c 25000

Balance amount of Rs. 25000 to M/s Bharti Traders is paid in full

The Golden rule for Personal and Real Accounts:

  • a) Debit the receiver
  • b) Credit what goes out

The Journal entry will be:

M/s Bharti traders Dr. 25000
To Bank A/c 25000

Machinery is sold to John for Rs. 55000.

The Golden rule for Personal, Real and Nominal Accounts:

  • a) Debit what comes in
  • b) Credit the giver
  • c) Credit all Income and Gains

The Journal entry will be:

Bank A/c Dr. 55000
To Machinery A/c 50000
To Gain on Sale of Machinery 5000

Modern Approach

Under this approach all the accounts are classified into the following five categories

  1. Assets Accounts
  2. Liability Accounts
  3. Capital Accounts
  4. Revenue Accounts
  5. Expense Accounts

Assets Accounts
Assets accounts are those accounts which relates to the economic resources of an enterprise such as Land and Building , Plant and Machinery , Furniture, Inventory, Bank and Cash etc. These are further categorized into tangible and intangible and current assets or fixed assets.

Liability Accounts
Liability accounts are accounts of lenders, creditors for goods, outstanding expenses etc.

Capital Accounts
These are the accounts of proprietors/partners who have invested an amount in the business. It includes both Capital Account and Drawings Account.

Revenue Accounts
These are accounts of incomes and gains. Examples like Sales, Discounts Received, Interest Received, Bad Debts recovered , etc.

Expense Accounts
These are the accounts of expenses or losses incurred in carrying the business. Examples like purchase, wages, salary, depreciation, discount allowed and rent.

Types of accounts Accounts to be debited Accounts to be credited
Asset Accounts Increase Decrease
Liability Accounts Decrease Increase
Capital Accounts Decrease Increase
Revenue Accounts Decrease Increase
Expenses Accounts Increase Decrease

Rules for Debit and Credit ( Modern Classification)

accounting-golden-rules

Frequently Asked Questions

Q- In accounting, why do we debit the receiver and credit the giver?

This is one of the three golden rules of accountancy in which the receiver is debited and the giver is credited. This is done in the case of personal account type transactions.


Q- Which accounting standards are applicable as per Section 133 of the Companies Act, 2013?

As per the sec 133 of the companies act 2013, central government will prescribe accounting standards recommended by ICAI and in consultation with NFRA.


Q- Is a sales or a purchases account a real or a nominal account?

Sales and purchase account can be treated as nominal account. According to nominal account Debit all expenses and credit all the gains, and we can see that purchase are expenses and sales are receipt.


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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.

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