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.

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Comments and feedback

    • 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.

    • 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.

  1. 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

    • 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 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

        • 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

    • 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)

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