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.

Three Golden Rules of Accounting
Three Golden Rules of Accounting

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.

Published by AtulHost

Creator of AtulHost. An ardent Linux user. Comes from a business management background. Loves to do research on modern business insights and enterprise solutions like career, education, finance, investments ideas, marketing strategies, and productivity skills; technological trends like automation, artificial intelligence, cloud and edge computing, computer hardware and networking, data science, and the internet of things.

Comments and feedback

    • 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.

  1. 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.

  2. 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.

  3. 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.

    • 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.

    • 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.

  4. 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.

    • 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.

  5. 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.

  6. 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?

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