AtulHost

Categories


Three Golden Rules of Accounting with Examples

Atul Kumar PandeyAtul Kumar Pandey

Creating journal entries requires some rules, such rule is named as Three Golden Rules of Accounting standards. There are three kinds of account as Personal Account, Real Account and Nominal Account. Let’s see the rules for those different account from scratch and in detail.

Three Golden Rules of Accounting

1. Personal Account

Personal account relates to persons with whom a business keeps dealings. A person called be a natural person or a legal person. If a person receives anything from the business, he is called receiver and his account is to debited in the books of the business. If person gives anything to business, he is called as a giver and his account is to be credited in the books of the business.

The Golden Rule for Personal Account is,

Debit the Receiver and Credit the Giver

Example: Goods worth 1000 bucks sold to Mr. Smith from Mr. John. In this transaction, Mr. Smith is the receiver of goods, he is called receiver and his account is to be debited in the books of business. Mr. John is the giver of goods, he is called giver and his account is to be credited in the books of business.

2. Real Account

Real account relates to property which may either come into the business or go from business. If any property or goods comes into the business, account of that property or goods is to be debited in the books of the business. If any property or goods goes out from the business account of that property or goods is to be credited in the books of business.

The Golden Rule for Real Account is,

Debit What Comes in and Credit What Goes out

Example: Goods sold on cash for 1500 bucks. In this transaction cash, an assets for business comes into the business on sales of goods, and therefore cash account is to be debited in the books of business. On the other side, goods, an assets of business goes out of the business on sale and therefore goods account is to be credited in the books of business.

3. Nominal Account

Nominal account is an account that relates to business expenses, loss, income and gains. If business incurs expense to manage and run business, account of that expense is to be debited in the books of business. When a business earns income by rendering services or hiring business assets, an account of that income is to credited in the books of business.

On other hand, if in the case the transaction of sale or purchase of goods or assets, if any loss is incurred by the business, account of that loss is to debited in the books or assets. if in the transaction of sale or purchase of goods or assets any profit is earned by the business, then account of that profit is to be credited in the books of business.

The Golden Rule for Nominal Account is,

Debit all Expenses or Loss and Credit all Income Gains or Profit

Example: (1) Paid 50 bucks as a commission to our agent, here commission which is paid to an agent is business expense and it is to be debited in the books of business. (2) Received 100 bucks as interest on our fixed deposit, here interest which is received is business income and therefore it is to be credited in the books of business.

The above all are the three golden rules of accounting with examples.

Atul is a regular blogger at atulhost who is a Professional WordPress Geek and SEO Specialist. He loves blogging on topics of business, entertainments, how to, tech news and web hosting topics. Stay tuned with him for more info.

Comments 39
  • Jagan
    Posted on

    Jagan Jagan

    Reply Author

    Personal A/C and nominal A/C to be same?


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Let me clear your doubt Jagan, both the account types and scenarios are totally different.

      In personal account there is a relation between person to any other person or party. So in case being in a business if any person is giving you a goods or services then you should debit the name of giver (because it’s personal account) and credit the giver (your account).

      Whereas in nominal account the scenario is based on business things like business expenses, loss, income and gains. So being a businessman you will debit all expenses and losses if occurs and credit all incomes and gains.


  • Anumod Markose
    Posted on

    Anumod Markose Anumod Markose

    Reply Author

    When a cash sales, should I mention the name of goods?
    Or should I enter like, Cash a/c debit to sales?


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Yes Anumod right…
      When cash sales the entry would be as,

      Cash a/c … Debit
      Sales a/c … Credit

      and Journal entry for a Cash Sales would be like this.

      Acc. | Dr. | Cr.
      —————-
      Cash | 300 | —
      Sales| — | 300
      —————-
      Total| 300 | 300


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Hi Anumod, Ashok Kumar Vaishnav answered your question too.


  • Shah Mohammed
    Posted on

    Shah Mohammed Shah Mohammed

    Reply Author

    Hello, I had a student of science after 3 year I took a admission in fybcom so commerce is totally new for me I have 1 doubt on how to identify personal account real account and nominal account in Question please?


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Personal Account: The accounts and elements which represent persons and organisations.
      – Mrs. Aarti’s A/c – representing Mrs. Aarti an individual.
      – M/s Arun & Co A/c – representing M/s Arun & Co. an organisation.
      – Capital A/c – representing the owner of the business, a person or organisation.
      – Bank A/c – representing Bank, an organisation.

      Real Account: The accounts and elements which represent tangible aspects.
      – Cash a/c – representing cash which is tangible.
      – Goods/Stock a/c – representing Stock which is tangible.
      – Furniture a/c – representing Furniture which is tangible.

      Nominal Account: The accounts and elements which represent expenses, losses, incomes, gains.
      – Salaries a/c – representing expenditure on account of salaries, which is an expense.
      – Interest received a/c – representing income on account of interest, which is an income.
      – Loss on sale of Asset a/c – representing the loss incurred on sale of assets, which is a loss.

      I hope this will clear your doubt about identifying three different accounts type in golden rules for accounting.


  • Ashok Kumar Vaishnav
    Posted on

    Ashok Kumar Vaishnav Ashok Kumar Vaishnav

    Reply Author

    Not required to mention the nature or product name, only cash received against cash sales naration is enough.


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Thanks Ashok for your contribution and answering question of Anumod Markose.


  • Abhishek Kr Singh
    Posted on

    Abhishek Kr Singh Abhishek Kr Singh

    Reply Author

    Graduation Level Accounting Questions With Answers. Thanks for Posting it.


  • Vivek
    Posted on

    Vivek Vivek

    Reply Author

    What about Capital A/c and liabilities? Where does it come in golden rules?


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Hi Vivek, Capital A/c and liabilities are noted in Journal entries and it follows the Golden Rules of Account. Capital account comes under Personal Account and Liabilities are like loan and debt so such kind of entries are recorded under Balance sheet.


  • Mary
    Posted on

    Mary Mary

    Reply Author

    Hi, My question is if we consider personal account is for person or an organisation. Now if a person or an organization incurs an expense of commission. Now how the rule should we apply. Is it to be Dr the receiver Cr the giver or Dr all expense and loss and Cr all income.


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Hi Mary, first of all let me clear your first point i.e., Personal Account could be only or a person not for organization. (Personal account relates to persons with whom a business keeps dealings) So use this rule, Debit the Receiver, Credit the Giver. It’s simple just try to identify the kinda account.


  • Shazia
    Posted on

    Shazia Shazia

    Reply Author

    Hi, I have a big doubt in the types of Personal Accounts can you pls. clear it. Pls pls because my exams are closer…


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Hi Shazia, as far as I know there is no kinda types in Personal account as there are three kinda accounts as Personal Account, Real Account and Nominal Account. But in modern accounting world three accounts you might see under Personal Account i.e.,

      Natural Account: It is related to individuals or natural persons made of flesh and bones.
      Artificial Account: It is related to artificial person recognized by Law – such as Manipal Learning Ltd, SBI, RBI, BEL. BHEL etc.
      Representative Account: Account of groups or representative such as Debtors, Creditors, outstanding expenses and prepaid insurance.

      I hope this will help you a lot. Good Luck.


  • Naman jain
    Posted on

    Naman jain Naman jain

    Reply Author

    Hello Sir,

    Thanks for your valuable guidance. It is very beneficial or us and also thanks for clearing all doubts in one place.

    Regards,
    Naman Jain


  • Sowmya
    Posted on

    Sowmya Sowmya

    Reply Author

    Hi Atul,

    I know Land does not have depriciation but it has appreciation value. Can you please explain how and why?


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Yes Sowmya, You are right. One way I can explain you this case with the help of demand and supply rule.

      Rule 1: When Demand Increases and Supply Decreases the Price of Value Increases and Vice Versa.
      Rule 1: When Demand Decreases and Supply Increases the Price of Value Decreases and Vice Versa.

      For an asset there is always supply thus, there is more space of production, but land is limited and very scarce. Therefore due to more demand and less supply of land the land always has an appreciation value. I hope you got my point very well.


  • rakesh mohanty
    Posted on

    rakesh mohanty rakesh mohanty

    Reply Author

    Good afternoon sir, please solve my doubt. What is difference between book keeping and accounting?


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Hi Rakesh,

      The accounting process involves recording, interpreting, classifying, analyzing, reporting and summarizing financial data. Bookkeeping is the process of recording financial transactions. Recording financial transactions is the first part of and the foundation of the accounting process.


  • Annies
    Posted on

    Annies Annies

    Reply Author

    Hello Mr. Atul, I have one small doubt in nominal account. Why expenses is to be debited in nominal account, may I know the reason?


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Simply I can say is because it is the Golden rules of account. But it is recorded in debit side because the balances on the right side of an account are credit balances. Since expenses cause a decrease to the owner’s equity credit balance, a debit entry is required. However, at the time that the expense is recorded, the amount is entered as a debit in an expense account.


  • Satyadeep Mohanty
    Posted on

    Satyadeep Mohanty Satyadeep Mohanty

    Reply Author

    What if ABC Ltd. has not paid the salary of June month, then what account will be debited and what account will be credited.


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Unpaid salaries are salary liabilities (salary outstanding) that you have incurred but have not paid. You must record all accrued salaries, employment taxes and related compensation expenses in the same period in which they are incurred. Here I am presenting 2 cases, one salary is unpaid and another is outstanding salary paid.

      1. Salary Outstanding

      Acc. | Dr. | Cr.
      —————-
      Salary A/c… Dr.
      To Salary Outstanding A/c
      (Being salary unpaid or due)

      2. Outstanding Salary Paid

      Acc. | Dr. | Cr.
      —————-
      Salary Outstanding A/c… Dr
      To Bank/Cash A/c
      (Being due salary cleared)

      I hope this will be helpful to you.


  • Rakesh Kumar Mohanty
    Posted on

    Rakesh Kumar Mohanty Rakesh Kumar Mohanty

    Reply Author

    Sir, Which transaction are recorded in debit side in journal, but these transaction are changed in credit side in ledger. Why it is change?


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Hello Rakesh, as I understand your question is about change of debit side entries of journal to credit side entries or vice-versa when we are adding entries from journal to ledger. account. It is recorded in opposite direction because your credit is someones debit and someones credit is your debit. It changes because the account has been changed. Ledger is always made for specific account, goods and services and it is more detailed in nature.


  • Abhinov Bhardwaj
    Posted on

    Abhinov Bhardwaj Abhinov Bhardwaj

    Reply Author

    Sir, My question is, what is the major difference between Public Accounting and Private Accounting?


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Hello Abhinov, thanks for asking a nice question. So Public account is account where you deal with business systems and where strong analytical is required. Whereas in Private account you mostly deal in business process, and need to know industry standards.


  • Randeep Singh
    Posted on

    Randeep Singh Randeep Singh

    Reply Author

    Hlo Sir I Have an Question about the dishonour of a bill.


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      A bill is said to dishonoured when a drawee fails to make the payment on the date of the maturity. In this case, liability of the acceptor is restored. Thus, the entries made on the receipt of the bill as reversed. Let’s say if ABC received bill of exchange accepted by XYZ, which dishonoured. Then entries of dishonour will be as,

      Acc. | Dr. | Cr.
      —————-
      XYZ A/c Dr.
      To Bills Receivables A/c
      (Being a bill dishonoured )

      I hope this will be helpful to you.


  • Prudhvi raj chowdary
    Posted on

    Prudhvi raj chowdary Prudhvi raj chowdary

    Reply Author

    Hi Atul, one of my friend got question when she attend for an interview.
    Interviewer question: why we need to prepare trading account when we are preparing P&L A/c. and Balance Sheet.


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Hi Prudhavi, it’s a basic thing to know. When we create a final account which is Profit and Loss account and Balance sheet we need to calculate first gross profit and loss; on the basis of which final accounts are created. Trading Account is the first stage in the process of preparing final accounts. Trading account shows the gross profit or gross loss during an accounting year. Thus, we need to prepare trading account first when we are preparing Profit and Loss account and Balance sheet.


  • shivu
    Posted on

    shivu shivu

    Reply Author

    Sir, can you please tell me the journal entry of “cash eaten by rat”?


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Hi Shivu, the cash eaten by rat doesn’t comes under abnormal loss and insurance claims. The loss on theft of cash and any other assets may be simply be expensed to the income statement net of any insurance claim received or receivable. Following accounting entries would therefore be required:

      Acc. | Dr. | Cr.
      ——-
      Loss on asset theft (balancing amount) A/c Dr.
      Accumulated Depreciation A/c Dr. (If it is required)
      To Asset (carrying amount) A/c.

      Incase if it was assets which has a claim by insurance company then there would be 2 more entries thus I am making a case here to explain how all entries will go. In this case, when insurance company is ready to give some percentages of claim.

      Acc. | Dr. | Cr.
      ——-
      Loss due to Accident A/c Dr.
      Insurance Claim A/c Dr.
      To Trading A/c Cr.
      (Being cash eaten by rat and insurance claim received)

      Entry for transferring loss to Profit & Loss A/c.

      Acc. | Dr. | Cr.
      ——-
      Profit & Loss A/c Dr.
      To Loss due to Accident A/c
      (Being entry recorded for transferring loss to Profit & Loss A/c)


  • ravi
    Posted on

    ravi ravi

    Reply Author

    Hi,

    I have a query regarding Accounts. Many times I have rejected in final round of interview only because of accounts knowledge. In my current organization or previous organization I never used these accounting thing, what I have learnt in my school and college life. Mostly I have experience of accounts receivable.

    So could you please tell me what should I have brush up before going to an interview. Because mostly every interviewer ask golden rule of accounts that I know. Anything you can suggest or any entries which they are surely ask for accounts receivable process.


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Hi Ravi, Glad to know that you are talking about practical uses of this. Basically when we are in colleges we tough predefined journal entries and accounting methods, but once we enter in the practical world nothing other than basic rules are followed. Thus, I would like suggest that make habit of learning current cases going on everywhere.

      Nowadays no one make journal entries on books but the same things are done with accounting software (My CA uses “QuickBook” for accounts and invoices; he also follows the real cases of multinational companies to make himself updated). So it’s better to learn more on real life transactions other than what we have studied yet.


  • dinesh
    Posted on

    dinesh dinesh

    Reply Author

    Hi Atul, first of all thanks for sharing this amazing accountancy rules with us. I have a question that loan from bank is a personal a/c or nominal a/c or real a/c?


    • Atul Kumar Pandey
      Posted on

      Atul Kumar Pandey Atul Kumar Pandey

      Author

      Hello Dinesh, from the fundamentals of accountancy, bank loan accounts for customer is Personal account and for banks it is a Real account.