Understanding the Golden Rules of Accounting: Debit and Credit Principles

What are the Golden Rules of Accounting?

The Golden Rules of Accounting, also known as the fundamental principles of accounting, are the basic guidelines that govern how financial transactions should be recorded. They are the cornerstone of accounting and are divided into three main categories:

Personal Account:

• Debit the Receiver, Credit the Giver: When dealing with personal accounts like individuals or organizations, debit what comes in and credit what goes out.

Real Account:

• Debit what comes in, Credit what goes out: For tangible assets like cash, property, or goods, debit what increases the account and credit what decreases it.

Nominal Account:

• Debit all expenses and losses, Credit all incomes and gains: For accounts related to expenses, incomes, gains, or losses, debit the ones that decrease profits and credit the ones that increase profits.

These rules form the foundation for recording transactions accurately in the accounting system. They guide accountants in maintaining the balance between debits and credits, ensuring that financial records accurately represent a company's financial health.

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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. Real accounts deal with material assets of the business.

• If the item that belongs to the real account is coming into the business, it should be written on the Debit side while making the accounting entries.
• If the item of the real account is going out of business, it should be written on the Credit side while making the accounting entries.

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Personal Accounts

• Personal accounts can be considered a general ledger related 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

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Nominal Accounts

Nominal Accounts represent all the transactions of business like Expenses, Losses, 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

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

Examples of 3 Rules of Accounting

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 was purchased from M/s Bharti Traders and paid Rs. 25000 in cash, and the remaining to be paid on a 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.

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:

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:

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:

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:

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:

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:

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:

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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 relate 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 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.

Rules for Debit and Credit ( Modern Classification)

Now that you are aware of the golden rules of debit and credit for accounting, we hope, the accounting will be much easier to handle. Well, it is important to maintain your accounts as it helps you keep track of your expenses and income and helps you furnish accurate records and documents while filing your ITR. File your ITR Now with Tax2win or

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