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 on 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 or entry into either

  • Real
  • Personal or
  • Nominal Accounts

Now let us take each accounting rule in detail.


Real Account

Real Accounts is a set of tangible aspects of business like furniture, cash, etc.

  • 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 the business then while making the accounting entries it should be written on the Credit side.
The accounting rule of real account goes like
“Debit what comes in,
credit what goes out”

Personal Accounts

  • 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 personal account goes like
“Debit the receiver,
Credit the giver”

Nominal Accounts

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

  • Electricity Expenses,
  • Telephone Expenses,
  • Interest Received,
  • Profit on 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 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 AccountingReal AccountsPersonal AccountsNominal Accounts
DebitWhat comes inThe ReceiverExpenses and Loses
CreditWhat goes outThe GiverIncomes 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  • Rs. 10000 withdrawn from the bank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.
  • Balance amount of Rs. 25000 to M/s Bharti Traders is paid in full
  • Machinery is sold to John for Rs. 55000.
TransactionsAccounts InvolvedTypes of Accounts
Goods Purchased from Mr. Mohan on CreditMr. MohanInventory (Stock)Personal AccountReal Account
Cash paid to Mr. MohanMr. MohanCashPersonal AccountReal Account
Goods sold to Mr. RehmanBankInventory (Stock)Real AccountReal Account
Cash withdrawn from BankCashBankReal AccountReal Account
Machinery Purchased from M/s Bharti TradersM/s Bharti TraderMachineryBankPersonal AccountReal AccountReal Account
Cash paid to M/s Bharti TradersM/s Bharti TraderCashPersonal AccountReal Account
Machinery Sold to John at a ProfitJohnMachineryGain on sale of MachinePersonal 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/cDr.15000
To Mr. Mohan 15000

Cash paid to Mr. Mohan for credit purchases

The Golden rule for Real and Personal Accounts:

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

The Journal entry will be:

Mr. MohanDr.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/cDr.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.

  • 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 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. Example 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?

Ans. This is one of the three golden rules of accountancy in which receiver is debited and giver is credited.


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

Ans. 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- What is the 150-hour rule in accounting?

Ans. The 150 hour rule is for those who are pursuing CPA as a compulsory requirement.


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

Ans. Sales and purchase account can be treated as either nominal account and real 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. According to the real account Debit what comes and credit what goes, and in purchase will be treated as comes in and receipt are goes out.


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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.