Golden Rules of Accounting- JAIIB Accounting & Finance

Golden Rules of Accounting: In financial accounting, it is important to be ascertained which account is to be credited and which to be debited. This dual entry system simplifies the complex book-keeping rules into a lucid set of principles that can be easily grasped, understood, and used. The golden rules of accounting are used in documenting financial transactions. The rules are based on the following three types of accounts:

Real Account

Real account deals with transactions relating to assets and liabilities. It includes all tangible and intangible assets. These accounts are carried forward to the next year. Hence, they are not closed at the end of the financial year but are shown on the balance sheet.

Personal Account

A general ledger account dealing with persons is known as a personal account. Individuals and firms and companies etc., come under this type of account.

Nominal Account

All business expenses, incomes, profit and losses accounts fall under the nominal account. This general ledger deals with transactions relating to one financial year. At the end of the fiscal year, the balances are set to zero to start afresh.

Golden Rules of Accounting

According to the Golden rules of accounting, the first step is to make sure the type of account suits each transaction. Each type has its own rules that should be applied accordingly for the transaction. 

There are three Golden Rules of Accounting

Debit the Receiver, Credit the Giver

This principle is applied in cases of personal accounts. An individual adding to the inflow (giving something) of a business/ organization should be added to the credit side in the book of accounts. The opposite is done in the other case so that the receiver is placed on the debit side. Here is an example:

Say you purchase Rs.10,000/- worth of goods (on credit) from XYZ Company. In your books, the Purchases Account will be debited, and XYZ company will be credited. Here the company account is credited because the company is the provider of the product. The purchase account is debited as you are the receiver of the goods. 

Date	Account	Debit (Amount Rs.)	Credit (Amount Rs.)
–/–/—-	Purchases A/c                       Dr.	10,000/-
	To XYZ Company A/c		10,000/-

Debit What Comes In, Credit What Goes Out

The Debit What Comes In, Credit What Goes Out principle is applied in cases of real accounts. A real account involves an asset account, a liability account, or an equity account. So, when what comes in is debited, it is added to the existing account balance. Exactly the opposite happens when you credit what goes out and the account balance is decreased. Here is an example:

Say you have purchased an office table of Rs. 15,000/- for cash from Rakesh. The furniture account in your books will be debited as the asset comes in. Similarly, the cash account will be credited as the payment is made in cash. 

Date	Account	Debit (Amount Rs.)	Credit (Amount Rs.)
–/–/—-	Furniture A/c                       Dr.	15,000/-
	To Cash A/c		15,000/-

Debit All Expenses and Losses, Credit All Incomes and Gains

This is to be followed in the case of a nominal account. Since the company capital is a liability, it has a default credit balance. When the incomes and gains are credited, the capital is increased. Debiting expenses and losses decreases the capital. Following this rule is essential to maintain the balance of the system. Here are some examples for a better understanding.

Example 1. Say you have paid Rs.10,000/- as salary through the bank account. Now, the salary account will be debited as it is an expenditure incurred. The bank account will be credited as the payment is made through the bank. The journal entry will be:

Date	Account	Debit (Amount Rs.)	Credit (Amount Rs.)
–/–/—-	Salary A/c                         Dr.	10,000/-
	To Bank A/c		10,000/-

Example 2. Say you sold machinery of Rs.1,00,000/- to ABC for Rs.1,15,000/- for cash. Now, the cash account will be debited as there is an inflow of cash. The machinery account will be credited as it is going out, and the Profit and loss account will also be credited because you have made a profit of Rs.15,000/-. The entry will be as follows:

Date	Account	Debit (Amount Rs.)	Credit (Amount Rs.)
–/–/—-	Cash A/c                         Dr.	1,15,000/-
	To Machinery A/c		1,00,000/-
	To Profit & Loss A/c		15,000/-

Conclusion: 

We hope that this article has been of help in providing all relevant details of the Golden Rules of Accounting. You can go through other similar articles available online at Oliveboard to increase your knowledge and understand the subject better.

Frequently Asked Questions: Golden Rules of Accounting

Question: What are the Golden Rules of Accounting?

Answer: There are three golden rules of accounting. They are explained as under:

• Debit the Receiver, Credit the Giver

This principle is applied in cases of personal accounts. An individual adding to the inflow (giving something) of a business/ organization should be added to the credit side in the book of accounts. The opposite is done in the other case, so the receiver is placed on the debit side.

• Debit What Comes In, Credit What Goes Out

The Debit What Comes In, Credit What Goes Out principle is applied in cases of real accounts. A real account involves an asset account, a liability account, or an equity account. So, when what comes in is debited, it is added to the existing account balance. The opposite happens when you credit what goes out and the account balance is decreased.

• Debit All Expenses and Losses, Credit All Incomes and Gains

This is to be followed in the case of a nominal account. Since the company capital is a liability, it has a default credit balance. When the incomes and gains are credited, the capital is increased. Debiting expenses and losses decreases the capital. Following this rule is essential to maintain the balance of the system. Here are some examples for a better understanding.

Question: What are the types of accounts?

Answer: They are:

Real Account: Real account deals with transactions relating to assets and liabilities. It includes all tangible and intangible assets. These accounts are carried forward to the next year. Hence, they are not closed at the end of the financial year. It is shown on the balance sheet.

Personal Account: A general ledger account dealing with persons is known as a personal account. Individuals and firms and companies etc., come under this account.

Nominal Account: All business expenses, incomes, profit and losses accounts fall under the nominal account. This general ledger deals with transactions relating to one financial year. At the end of the fiscal year, the balances are set to zero to start afresh.