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

    • 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.

  1. 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.

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

    • 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.

  3. 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.

    • 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.

  4. 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

    • 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.

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