Golden Rules of Debit and Credit : Basic Accounting

Golden rules of accounting convert complex book-keeping rules into a set of well defined principles which can be easily studied and applied. They are also called the traditional rules of accounting or the rules of debit and credit.

In accounting every transaction is recorded. And Every transaction involves two accounts. One account receives the benefits and the other accounts gives the benefits. The account which receives the benefits is called the Debit Accounts and the account which gives the benefits is called the Credit Accounts. And the value of debit entry is equal to the value of credit entry.

Now deciding which account is to be debited and which account to credited is not easy and some time confusing for many. And for this reason we have three golden rules of accounting, which helps in deciding the debit and the credit accounts in every transaction.

Here, the accounts are divided into groups and separate rules are applied to different groups of accounts and the rules defines which account should be debited and which accounts to be credited based on the nature of transaction.

The double entry system has broadly divided the accounts into 2 different groups :

  1. Personal Accounts
  2. Impersonal Accounts

And the Impersonal account is further sub-divided into 2 groups

  1. Asset or Real Account
  2. Nominal or fictitious Account

And the three golden rules are applied into these 3 different groups(Personal Accounts, Real Accounts and Nominal Accounts) of account and helps us in identifying the debit and the credit account.

1 :- Personal Accounts : Debit the Receiver, Credit the Giver

A personal Account relates to Persons or group of persons.

If a person receives any thing from the business, then the person is called the receiver and the person’s account is debited in the book of business.

If a person gives any thing to the business, then the person is called the giver and the person’s account is credited in the book of business

Golden Rules for Personal Account :  Debit the Receiver, Credit the Giver

Examples:

1 : Rs. 1000 Cash Paid to Ram store for some goods bought in past. 

This is a transaction involving “Cash Account” and “Ram Store Account”. Out of these two accounts “Ram Store Account” is personal account, and the golden rules of Accounting for personal account will be applied to only this account.

Here “Ram store account” receives the benefits, and hence it is the receiver. And here the account is Debited as per personal accounts rules,Debit the receiver and credit the giver.

2 : Goods worth Rs. 500 sold to Mr. Shyam from Mr. Sid.

This is a transaction and here, Mr. Shyam receives the goods, and hence he is called the receiver and his account is to be debited. Mr. Sid on the other end is the giver of goods, and he is called the giver and his account is to be credited.

Personal Account is further divided into 3 sub-groups:

  • Natural Personal Accounts. like Capital Account or Shyam’s Account
  • Artificial Personal Accounts. like Ram store account, or Canara Bank Account, etc
  • Representative Personal Accounts. Like rent received in advance accounts, prepaid insurance accounts, etc

2 :- Real Accounts : Debit what comes in, Credit what goes out

Real accounts represents assets or properties like machinery, land, building, etc of the business. And Assets/properties may either come into the business or go out of the business.

If the asset/property comes into the business i.e purchased, the corresponding account is to be debited. And if the assets/properties goes out of the business i.e sold, the corresponding account is to be credited in the book of business.

Golden Rules for Personal Account :  Debit what comes in, Credit what goes out

Example

1 : Rs. 1000 Cash Paid to Ram store for some goods bought in past. 

This is a transaction involving “Cash Account” and “Ram Store Account”. Out of these two accounts “Ram Store Account” is personal account, and “Cash Account: is the Real Account.The golden rules of Accounting for personal account will be applied on “Ram Store Account” and Real Account rules will be applied on “Cash Account”.

Here Cash is paid to “Ram store account” which means Cash goes out of the business. So “Cash account” is to be credited based on real Account Rules.

Cr   Cash Account  by Rs 1000   :   Real Account Rule

Dr  Ram Store Account  by Rs 1000    :   Personal Account Rule

3 :- Nominal Accounts : Debit all the expenses and losses, Credit all incomes and gains

Nominal Account is the account that related to expenses, losses, incomes and gains. For example rent account, wages, insurance, commission, etc. Expenses, gain, losses and incomes are intangible, they cannot be seen but can be measure.

If business incurs expense to manage/run the business, the corresponding expense account is to be debited in the books of business. And when a business earns income by rendering services or hiring business assets, then the corresponding income account is to credited in the books of business.

Golden Rules for Personal Account :  Debit all the expenses and losses, Credit all incomes and gains

Example

Ram paid Rs. 10,000 as salary to his employees.

This is a transaction involving “Salary Account” and “Cash Account”. Salary Account is a nominal account and Cash Account is a real account.

As salary is paid to employees it is an expense. And by Nominal Accounts Rule all the expenses are debited, hence the Salary account is to be debited.

On the other end the Rs 10,000 is paid to employees which means cash goes out of the business. And by Real Accounts Rule what goes out is to be credited and hence the Cash Account is to be credited

Dr  Salary Account by Rs 10000   : Nominal Accounts

Cr. Cash Account by Rs 10000   :  Real Accounts

And with this the three golden rules of accounting is over.

The three golden rules of accounting helps in understanding and identifying the accounts debited and credited.

If you have any query please leave a comment below and I will reply to it.

2 thoughts on “Golden Rules of Debit and Credit : Basic Accounting”

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