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Golden Rules of Accounting with example

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Golden rule is said to be the foundation stone of accounting, This is the rule using by which all accounting & Financial report are built. The term ‘Golden rules of accounting’ is popularly used in Indian Accounting.  Harold Averkamp of accountingcoach.com clearly states that no books are found with this topic Golden Rule of Accounting in USA.Instead they are using rules for debit and credit.This is the rules of journalising the transactions. In double entry system, there are two aspects for each transaction called ‘Debit’ and credit. The journal entry wrote after analyzing these two aspects.

Golden Rules for types of accounts

As we know there are three types of account in double entry system. Each type of accounts have different rule to find out the Debit & Credit.

Recommend Read: Examples of Golden Rules of Accounting 

Rule of Real Account.

  • Debit What comes In.
  • Credit What Goes Out.

Explanation: Real account is related asset,Hence When an Asset is moving out of business,That asset should be Credited,and when an asset coming in should be debited.

Tips for Debit and Credit

Debit When asset Increases.

Credit When asset Decreases.

Example :

Purchased Machinery from ABC for  Credit  5000, Find out the dual aspect.

Aspect 1 = Machinery Increases or coming in  Business

Aspect 2 = Liability Increased or Credit the Given (refer the rule of personal account)

journal entry 

JOURNAL
Date Particulars JF Debit Creidt
xx/xx/xxxx Machinery a/c …..Dr 5000
(Debit What comes In)
 To; ABC A/c 5000
(Credit What Goes Out)
( Purchased Machinery from ABC for  Credit  )

Rules of personal account.

  • Debit the receiver
  • Credit the giver

Explanation:  Personal account is related to individual or artificial persons created by law like Corporates, LLP,LLC ,LTD etc.

When Money is  paid or to be paid  to a Person or company, That person should be debited.

When Money is received or to be received  from a person or company that person should be Credited.

Example :

Purchased goods for 10000 from  Abraham Mathew

The journal entry

Credit The giver  -Here Giver is Abraham Mathew hence credited.

Debit All Expense – Purchase is expense to the company

JOURNAL
Date Particulars JF Debit Creidt
xx/xx/xxxx Purchase a/c …..Dr 10000
(Debit All Expenses)
 To; Abraham Mathew A/c 10000
(Credit The Giver)
( Purchased goods for 10000 from  Abraham Mathew)

Tip : Credit  when Liability Increases  ( Here liability increases ,amount payable to Abraham Mathew) Debit When Liability Decreases.

Rules for Nominal Account

  • Debit All expense or Losses
  • Credit All Income or Gains.

Example:

Commission Paid   1000

The journal Entry

Nominal account rule – Debit all Expense -Commission is the expense

Real account rule – Credit what goes out – Cass (Asset) is goes Out

JOURNAL
Date Particulars JF Debit Creidt
xx/xx/xxxx Commision  a/c …..Dr 10000
(Debit All Expenses)
 To; Cash  A/c 10000
(Credit What Goes Out)
( Commission Paid  )

Tip: Debit When Expense Increase and credit when Income Increases.

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