Golden rules of accounting

Accounting is totally based on journal entry system. It is very crucial to put any entry at the right side otherwise the results would be fatal. To avoid the entry level mistakes, accountants use three basic rules which are also called ‘golden rules of accounting’.

These 3 golden rules of accounting are as follows:

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

Accounting is almost incomplete without these rules.

Relation between golden rules of accounting and types of account:

These rules of accounting are linked with types of accounts used in accounting. Before knowing the relation, it would be better to understand the different types of account.

Types of account:

There are three types of account as follows:

  1. Personal account
  2. Real account
  3. Nominal account

Now it would be easier to under the relationship between these two:

The very first rule i.e. debit the receiver and credit the giver, applies for all personal accounts.

The second rule i.e. debit what comes in and credit what goes out, applies for real accounts.

Last golden rule of accounting i.e. debit all expenses & losses and credit all income & gains, applies for nominal accounts.

Example:

Purchased furniture for 5,000 in cash

AccountTypeRule
Furniture A/cRealDebit what comes in
Cash A/cRealCredit what goes out

Journal Entry:

AccountDebit/ CreditAmount
Furniture A/cDebit5000
Cash A/cCredit5000

Goods sold for 3,000 on credit to XYZ Ltd

AccountTypeRule
XYZ Ltd A/cPersonalDebit the receiver
Sales A/cNominalCredit all income & gains

Journal Entry:

AccountDebit/ CreditAmount
XYZ Ltd A/cDebit3000
Sales A/cCredit3000

Electricity bill paid for 800

AccountTypeRule
Expenses A/cNominalDebit all expenses & losses
Cash A/cRealCredit what goes out

Journal Entry:

AccountDebit/ CreditAmount
Expenses A/cDebit800
Cash A/cCredit800

 

 

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