What are the Golden Rules of Accounting with example

The Golden Rules of Accounting are the foundation of all financial record-keeping. Whether you are a student, a small business owner, or an aspiring accountant, mastering these golden rules will make your accounting journey much easier and more structured. By applying the golden rules correctly, you can ensure that every transaction is properly documented and your financial statements reflect a true and fair view of your business.

What are the Golden Rules of Accounting?

The Golden Rules of Accounting are a set of universal principles that guide how transactions are recorded using the double-entry system. In this system, every transaction has two sides — a debit and a credit — ensuring that the accounting equation (Assets = Liabilities + Capital) remains balanced.

These rules simplify the decision-making process for identifying which accounts to debit or credit for any financial transaction.

Types of Accounts

To apply the golden rules effectively, you must first understand the three major types of accounts in accounting:

1. Personal Account
   Deals with individuals, firms, and companies.
   Examples: Ram’s Account, Bank Account, XYZ Ltd.

2. Real Account
   Deals with tangible and intangible assets owned by the business.
   Examples: Cash, Furniture, Machinery, Building, Goodwill.

3. Nominal Account
   Deals with expenses, losses, incomes, and gains.
   Examples: Salary, Rent, Commission, Interest, Discount.

Each of these account types has a specific golden rule that dictates how transactions are recorded.

The 3 Golden Rules of Accounting

Let’s explore the three golden rules in detail with examples.

Rule 1: Debit all expenses and losses, credit all incomes and gains

This rule applies to Nominal Accounts.
Expenses and losses reduce the business’s capital, so they are debited. Incomes and gains increase capital, so they are credited.

Examples:

• Rent paid ₹10,000
  → Rent A/c Dr ₹10,000
  → To Cash A/c ₹10,000
  (Debit all expenses and losses)

• Commission received ₹5,000
  → Cash A/c Dr ₹5,000
  → To Commission A/c ₹5,000
  (Credit all incomes and gains)

Rule 2: Debit the receiver, credit the giver

This rule is used for Personal Accounts.
When a person or organization receives something, their account is debited. When they give something, their account is credited.

Examples:

• Paid ₹5,000 to Ram
  → Ram’s A/c Dr ₹5,000
  → To Cash A/c ₹5,000
  (Debit the receiver, credit the giver)

• Received ₹2,000 from Sita
  → Cash A/c Dr ₹2,000
  → To Sita’s A/c ₹2,000
  (Debit the receiver, credit the giver)

Rule 3: Debit what comes in, credit what goes out

This rule applies to Real Accounts.
Assets coming into the business are debited, while those going out are credited.

Examples:

• Bought furniture for ₹15,000 in cash
  → Furniture A/c Dr ₹15,000
  → To Cash A/c ₹15,000
  (Debit what comes in, credit what goes out)

• Sold old machinery for ₹10,000
  → Cash A/c Dr ₹10,000
  → To Machinery A/c ₹10,000
  (Debit what comes in, credit what goes out)

Understanding Debit and Credit Just Got Easier

Once you understand the nature of each account and the corresponding golden rule, determining what to debit or credit becomes straightforward.

By practicing these, you’ll find that understanding debit and credit just got easier.

Golden Rules in Practice

Let’s apply all three golden rules to real-life transactions:

1. Paid salary ₹20,000 in cash.

   • Salary → Expense → Nominal Account → Debit

   • Cash → Asset → Real Account → Credit
     Journal Entry:
     Salary A/c Dr ₹20,000
     To Cash A/c ₹20,000

2. Received ₹50,000 from Mohan.

   • Cash → Asset → Real Account → Debit

   • Mohan → Person → Personal Account → Credit
     Journal Entry:
     Cash A/c Dr ₹50,000
     To Mohan’s A/c ₹50,000

3. Purchased goods worth ₹30,000 from Ramesh on credit.

   • Purchases → Expense → Nominal Account → Debit

   • Ramesh → Person → Personal Account → Credit
     Journal Entry:
     Purchases A/c Dr ₹30,000
     To Ramesh’s A/c ₹30,000

These examples show how applying the rules correctly ensures every transaction is accurate and compliant with accounting standards.

Benefits of the Golden Rules of Accounting

1. Accuracy in Financial Records – Ensures that every transaction is recorded correctly.

2. Consistency – Follows a uniform approach to recording transactions.

3. Error Prevention – Reduces confusion and prevents wrong entries.

4. Simplicity for Beginners – Easy-to-understand rules make learning accounting simpler.

5. Foundation for Financial Reporting – Helps prepare ledgers, trial balances, and statements accurately.

Conclusion

The Golden Rules of Accounting are the pillars of bookkeeping. They help maintain accuracy, consistency, and clarity in financial records. For beginners, these rules —
1️⃣ Debit all expenses and losses, credit all incomes and gains,
2️⃣ Debit the receiver, credit the giver, and
3️⃣ Debit what comes in, credit what goes out —
make accounting simpler and logical.

By understanding the types of accounts and applying these rules in daily transactions, understanding debit and credit just got easier. Whether you are learning accounting for academic purposes or managing your own business, these rules will guide you toward maintaining precise and reliable financial records. You can learn all these accounting fundamentals and practical applications from India’s best learning platform — Ready Accountant Institute in Kolkata, a trusted name for professional accounting and taxation training