Three golden rules of accounting with examples
In the accounting field, especially in the finance section, we are taught to create and pass the journal entries in the books of accounts. One must have knowledge of basic accounting rules in order to maintain the transactional entries. There are three rules here which are known as the three golden rules of accounting, in short accounting golden rule.
The name of those rules may vary from country to country like – three golden rules of commerce, three golden rules of finance, and the golden rules of bookkeeping. In this article, I’ll try my best to explain those three golden rules of accountancy with examples and demonstrate usage of the rule.
What are the three golden rules of accounting?
Golden rules of accountancy are divided as Personal, Real, and Nominal accounts. This is the reason why we call it the three golden rules of accounting. Let’s understand the rules of each and every account in detail.
1. Personal Account
The 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 a receiver and his account is debited in the books of the business. If a person gives anything to the business, he is called 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
Three Golden Rule of Accounting: Personal Account
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 a 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
The real account relates to property which may either come into the business or go from the business.
If any property or goods come into the business, the 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 are to be credited in the books of business.
The Golden Rule for Real Account is,
Debit What Comes In and Credit What Goes Out
Three Golden Rule of Accounting: Real Account
Example: Goods sold on cash for 1500 bucks. In this transaction cash, an asset 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, 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
The nominal account is an account that relates to business expenses, loss, income, and gains.
If the business incurs expense to manage and run business, the 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 the other hand, if in the case of the transaction of a sale or purchase of goods or assets, if any loss is incurred by the business, the account of that loss is to debited in the books of assets. If in the transaction of sale or purchase of goods or assets any profit is earned by the business, then the account of that profit is to be credited in the books of business.
The Golden Rule for Nominal Account is,
Debit All Expenses and Losses and Credit all Incomes and Gains
Three Golden Rule of Accounting: Nominal Account
Example 1: Paid 50 bucks as a commission to our agent, here commission which is paid to an agent is a business expense and it is to be debited in the books of business.
Example 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.
Related Reads in Book of Accounts:
The above all are the three golden rules of accounting.
Personal A/C and nominal A/C to be same?
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.
When a cash sales, should I mention the name of goods?
Or should I enter like, Cash a/c debit to sales?
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
Hi Anumod, Ashok Kumar Vaishnav answered your question too.
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?
Personal Account: The accounts and elements which represent persons and organizations.
– Mrs. Aarti’s A/c – representing Mrs. Aarti an individual.
– M/s Arun & Co A/c – representing M/s Arun & Co. an organization.
– Capital A/c – representing the owner of the business, a person or organization.
– Bank A/c – representing Bank, an organization.
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.
Not required to mention the nature or product name, only cash received against cash sales naration is enough.
Thanks Ashok for your contribution and answering question of Anumod Markose.
Graduation Level Accounting Questions With Answers. Thanks for Posting it.
What about Capital A/c and liabilities? Where does it come in golden rules?
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.
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.
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.
Dr all expenses or loss
Cr all income and gains or profit
Hi, I have a big doubt in the types of Personal Accounts can you pls. clear it. Pls pls because my exams are closer…
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.
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
Hi Atul,
I know Land does not have depriciation but it has appreciation value. Can you please explain how and why?
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.
Good afternoon sir, please solve my doubt. What is difference between book keeping and accounting?
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.
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?
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.
What if ABC Ltd. has not paid the salary of June month, then what account will be debited and what account will be credited.
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.
Sir, Which transaction are recorded in debit side in journal, but these transaction are changed in credit side in ledger. Why it is change?
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.
Sir, My question is, what is the major difference between Public Accounting and Private Accounting?
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.
Hlo Sir I Have an Question about the dishonour of a bill.
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.
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.
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.
First we need to find out the profit from core operating activities, because that is necessary to our core activities as they are profitable or not. Then secondary things will be considered.
Sir, can you please tell me the journal entry of “cash eaten by rat”?
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)
Loss by rats (or by any cause like loss by flood, loss by theft, loss by embezzlement, etc.) a/c …… Dr.
Cash a/c …… Cr.
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.
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.
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?
Hello Dinesh, from the fundamentals of accountancy, bank loan accounts for customer is Personal account and for banks it is a Real account.
Hello Atul, I want to know difference between prepaid and postpaid expenses.
Hi Nishant, first of all thanks for presenting your query in account. Prepaid Expenses represent goods or services delivered over a period of time, but which are paid in a lump sum at the beginning of that time period. Whereas Postpaid Expenses are just opposite to it. The amount of prepaid expenses that have not yet expired are recorded on a company’s balance sheet as an asset. Whereas postpaid expenses are recoded on a company’s balance sheet as an liability.
Thank you sir for posting such a difficult topic in simple way. Examples are really helpful.
Hi Atul, I want to know what is different between Gross Profit and Net Profit.
Hi Salman, Gross profit is sales revenues minus the cost of goods sold. Net Profit means all revenues minus all expenses including the cost of goods sold, the selling, general, and administrative expenses, and the non-operating expenses.
Dear Sir,
Greetings !
What is the trail balance sheet.
It is not known as trial balance sheet, but it is “Trial Balance” which consists of all you transactions of every nature.
What is the basic rule of committee account or how to prepare a committee account sir please tell me immediately jts very urgent for me
Whatever be the account the golden rules of account will be same and applicable to all kinds of account.
Cash paid to Etisalat is refundable deposit 2000dhs? How is entry?
It must go like it,
Refundable Deposit … Dr.
To Cash … Cr.
Also, You may appropriately indicate which the corresponding account is affected, example, refundable deposit – internet or refundable deposit – telephone and similar accounts.
Hi Sir, could you please tell me what should the entry when my furniture lost due to ant.
Hi Vivekanand, first of all confirm that this entry is covered by insurance or not. If yes then it will go like below example.
1. Entry for purchase of goods.
Purchase A/c…Dr. 400000
To Cash A/c 400000
2. Entry for recording loss of goods and creating insurance claim.
Loss Due to Accident A/c…Dr. 100000
Insurance Claim A/c……..Dr. 300000
To Trading A/c 400000
3. Entry for transferring loss to Profit & Loss A/c.
Profit & Loss A/c………Dr. 100000
To Loss Due to Accident A/c 100000
If entry is not covered by insurance then what should the entry
It’s simple just remove the insurance part and adjust the loss amount.
1. Entry for purchase of goods.
Purchase A/c…Dr. 400000
To Cash A/c 400000
2. Entry for transferring loss to Profit & Loss A/c.
Profit & Loss A/c………Dr. 400000
To Loss Due to Accident A/c 400000
It’s simple just remove the insurance part and adjust the loss amount.
1. Entry for purchase of goods.
Purchase A/c…Dr. 400000
To Cash A/c 400000
2. Entry for recording loss of goods
Loss Due to Accident A/c…Dr. 400000
To Trading A/c 400000
3. Entry for transferring loss to Profit & Loss A/c.
Profit & Loss A/c………Dr. 400000
To Loss Due to Accident A/c 400000
Dear sir, I want to know entry for debit note and credit note.
When the purchaser returns the goods to the seller the Purchaser sends a Debit Note to the seller (ie. the purchaser debits the seller in his books ie. Purchasers Books) and the Seller sends a Credit Note to the purchaser (ie. the seller credits the Purchaser in his Books ie. Sellers Books). Following are the Journal Entries to be passed:
Entry for Credit Note:
Sales Return inward A/c. ………. Dr.
Output VAT A/c. ………. Dr.
To Debtor A/c.
(Being goods returned by the customer)
Entry for Debit Note:
Creditor A/c. ………. Dr.
To Goods Return A/c.
To Input VAT A/c. (i.e. Reverse Credit)
(Being goods sent back to the seller)
Nice information for all accounting related students
Thanks Chandu for your kind feedback. Don’t forget to subscribe us.
Your way of explanation is very simple and goes directly into the mind. Loved it.
Thanks, Hunar for your feedback.
Sir what would be the entry for salary paid to kishan rs. 4000 and why?
Hi, Shalini, the entry for salary made would be like this…
Because salary is the expense that’s why it is debited and cash is going out so it is credited.
Why don’t we debit Kishan’s A/c. since the receiver shall be debited?
Since you are making a payment as Salary when you pay for any purpose your need to make an entry in the form of account.
All the expenses and losses come on the nominal side but why outstanding expenses come on the personal side?
Nominal accounts prefixed or suffixed with the terms outstanding, prepaid, or pre-received are personal accounts. Because Outstanding Expenses A/c is a personal account with a credit balance. The balance indicates the amount that is owed by the Organisation on account of unpaid expenditure.
Hi Atul Sir, I have big problems with journal entries, sometimes I couldn’t understand which a/c should be debited and which should be credited. So, Please clear me.
Hi, Ziya, passing journal entries in books of account is somewhat difficult if you are not paying attention to three golden rules of account. However I have written an article on Journal Entries in Accounting: Basics, have a look and do some problem solving it will sure help.
Hi Ziya, always remember in an easy way like –
“Giver was Rich then it is always in Credit and Receiver was Poor then it is always in Debit”.
Simple and straight answers. Thanks, Atul.
You’re welcome Jeet. Stay tuned for more accounting updates.
Hey Atul Kumar, Thanks very much for your time and effort on answering such questions. I have also something to ask:
1. From the three a/c rules, which one can be apply for Liabilities and Capital A/c.?
2. What is the difference between adjusted trial balance and unadjusted trial balance?
3. What are their advantages in accounting.
Regards,
Eva Jacks
Hi, Eva, thanks for your feedback and I am glad that you have shown interest in accounts. Below is the answer to all your queries.
1. Liabilities are noted under Real A/c. and Capitals are noted under Personal A/c.
Read more about Classification of Accounts here.
2. The differences between an adjusted trial balance and an unadjusted trial balance are the amounts recorded as part of the adjusting entries. Adjusted trial balance is one where are the adjustments are taken into consideration and its final. Un-adjusted trial balance is in its intermediary state and there are adjustments to yet to be made to them.
3. Trial balances give a snapshot of the state of the company at periodic intervals, such as monthly or quarterly, by looking at all entries in the company’s general ledger.
I hope your all doubts are clear now.
Hello sir, Please clear me here – the (debit the receiver, credit the giver) rule for Personal A/c. Why we debited the receiver? For example: I paid Rs. 1000 to Ram. It means ram is reciver and Ram is debited by 1000. Since I gave the money, my account should be debited and vice versa. But double entry rule says opposite and it confuses me all time. Please help me.
Hello, Poonam, I can understand that account is not easy to start, we have to understand the whole process first. Let’s come to the point. Double-entry accounting is based on the fact that every financial transaction has equal and opposite effects in at least two different accounts. So each entry has to be recorded by maintaining the relations.
Good afternoon sir, first of all thanks for making this simple to us. Please my question is what are the likely questions interviewer asked in term of accounting in bank for instance.
Thanks for the comment Okunzuwa Sarah. This seems to be career based question so I better answer in that way. You will be asked questions like payments, receipts, outstanding, taxes, bills of exchange and all. You’ll be asked any question that related to banking sector and based on real life transactions. Most bank uses accounting software here are some of them – CGram Software, Financial Force, Microsoft Accounting Professional, Microsoft Dynamics AX and Microsoft Small Business Financials.
Sir, Please tell me the entry of “Interest received from bank”. Here interest is a Nominal A/c and bank is Personal A/c.
It’s so simple Sourav,
Explanations:
– Bank A/c. comes under Personal A/c.; so the rule we applied here is “Credit The Giver”.
– Interest Received A/c. comes under Nominal A/c.; so the rule is “Credit All the Incomes and Gains”.
Thanks sir but will be in credit leg?
Yes Sourav, Interest Receive will be on credit side.
Good morning sir, I have a doubt in a transaction i.e. trade discount allowed to customer on sale which account should be debited. Please give me answer.
First of all, trade discounts are not recorded in journals. You should use final net amount while making any entries.