Golden Rules of Accounting with example
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Golden rule is said to be the foundation stone of accounting, These are the rules by using which all accounting & Financial report are built. From posting of transactions to preparing Final accounts are based on it.The term ‘Golden rules of accounting‘ is popularly used in Indian Accounting. In other part of the world it is called Rules of Debit & Credit.This is the rules of journalising the transactions. In double entry system, there are two aspects for each and every transactions. They are called ‘Debit’ and credit. The journal entry wrote after analyzing these two aspects.
Golden Rules of accounting & examples
As we know there are three types of account in double entry system. Real Account, Nominal Account, Personal Account. Each type of accounts have different rule to find out the Debit & Credit.
Golden Rule of Real Account.
Real Account is an account does not close at the end of the Financial year and the balances are carried forward to the next year.Generally Real accounts are accounts which are related to Assets. For example, Building, Vehicle, Machinery, Furniture ETC.
- 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.
Real Account Example 1 :Purchased Machinery from ABC for Credit 5000, Find out the dual aspect.
Aspect 1 = Machinery Increases or coming in to Business
Aspect 2 = Liability Increased or Credit the Given (refer the rule of personal account)
|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 )|
Real Account Example 2 : Computer Purchased For cash 25000
In this example, the two aspects are Computer & Cash , Both of these are assets and it is one of the best example of real account transactions.
Computer -What Comes in = Debit
Cash – What Goes Out = Credit
Golden Rules of personal account.
These are accounts related to Persons,Institutions,Companies, Trust or other form of Institutions. For example buyer of a commodity like TATA Ltd, Lulu international, Account created when giving a loan to person like Mr .Jacob Loan Account, Supplier of a commodity Southern Steels, Mahaveer Threads , Loan from financial institution like Gokulam Finance etc are the examples of personal account.
The debit and credit rules are as follows.
- 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.
Personal Account Example 1: 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
|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.
Personal Account Example 2 :Received cash from Micheal Trade Lines 5000 towards their pending payment.
In this example the components of transactions are Cash and Micheal Trade Lines. Cash is asset, hence related to real account where as Micheal Trade links is a Customer or Buyer who buys goods from us.Hence Micheal Trade Links is a person or related to personal account.
Cash – What comes in – Debit
Micheal Trade Lines – The Giver – Credit
The Journal can be draft as follows.
Golden Rules for Nominal Account
Nominal accounts report to revenue and expenses or loss or gains.It is a temporary account and will be closed at the end of every Financial year by transferring the total to the profit and loss account. Interest received, Interest paid, Commission received, Commission paid, Outstanding Rent, Out standing salaries are the examples.
Rules for debit and credit of nominal account are as follows
- Debit All expense or Losses
- Credit All Income or Gains.
Nominal Account Example 1 : 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
|xx/xx/xxxx||Commision a/c …..Dr||10000|
|(Debit All Expenses)|
|To; Cash A/c||10000|
|(Credit What Goes Out)|
|( Commission Paid )|
Nominal Account Example 2 : Bank Interest credited to SBI Bank account Rs 1200
Here the two sides of transactions are State Bank of India & Bank Interest. State Bank of India is an asset account, that is Real Account and Bank Interest is an Income account, hence related Nominal account.
State Bank Account – What Comes In – Debit
Bank charges – All Incomes –Credit
The journal entry is drafted as.
Tip: Debit When Expense Increases and credit when Income Increases.
Hope you enjoyed learning three Golden rules of accounting, Those are very useful and easy to understand for beginners. Without the proper understanding of golden rules no student and professional can move forward in accounting study and job.I recommend to spend more time on this and become a master in making debit and credit. No doubt in future all complex accounting functions can be handled without any trouble.
Here is video tutorial by Letstute Accountancy