What Are The 3 Golden Rules Of Accounting?

Bookkeeping is only one aspect of financial accounting. Every transaction in accounting has two entries: a debit entry and a credit entry. As an accountant, it's best to know which account to be debited and the one that should be credited. This is called the dual entry accounting system. In this article, we will learn about the 3 golden rules of accounting with examples.

Financial accounting is centered on three rules, popularly known as the 3 golden rules of accounting and bookkeeping. These golden rules guarantee systematic recording of financial transactions in their appropriate books. The golden rules simplify complicated book-keeping rules into a series of simple principles which can be easily studied, understood, and applied.

Types Of Account In Accounting

According to a writing service company, there are 3 types of accounts in accounting: real account, nominal account and personal account. The golden rules of accounting makes it mandatory that we first ascertain the type of account.

1. Real Account

A real account records all transactions involving assets and liabilities. Assets include furniture, land, building, machinery, goodwill, copyright, patents, etc. Furniture account is an example of a real account. They appear in the balance sheet.

For Real Account:

1. Dr - What comes in
2. Cr - What goes out

2. Personal Account

A personal account is an account relating to people and individuals. Examples are companies, firms, associations, etc. An example of a personal account is the creditor account.

For Personal Account:

1. Debit is the receiver.
2. Credit is the giver.

3. Nominal Account

A nominal account is an account relating to all income, expenses, profit and losses of a business. An example of the nominal account is an interest account.

For Nominal Account:

1. All gains and income are credited.
2. All losses and expenses are debited.

Each type of account has its own rules which are different from one another that needs to be applied to account for the transactions. The golden rules have been listed below:

ALSO READ: Meaning and Types Of accounting Ratio

The 3 Golden Rules Of Accounting

The 3 golden rules of accounting makes it possible for anyone to be a bookkeeper. They only need to understand the different types of accounts and then apply the rules diligently.

1. Debit The Receiver, Credit The Giver

This type of accounting rule is used in the case of personal accounts. Personal account includes individual account, debtors and creditors account, etc. When a person gives something to the business, it becomes an inflow and therefore the person must be credit in the books of accounts. The opposite of this is also true, which is why the receiver needs to be debited.

ALSO READ: Meaning of Data Processing In Accounting

2. Debit What Comes In, Credit What Goes Out

This type of accounting rule is only applied in case of real accounts. Real accounts involve accounts for assets e.g machinery, land and building etc. By default, they have a debit balance. Therefore, when you debit what comes in, you are adding to the already existing account balance. This is specifically what needs to be done in the books of account. Similarly when you credit what goes out, you are reducing the account balance when a tangible asset goes out of the business.

ALSO READ: International Accounting Standard, All you need to know

3. Debit All Expenses and Losses, Credit All Incomes and Gains

This accounting rule is applied when the account in question is a nominal account. Nominal accounts are account for expenses incurred, income received, loses and gains. The capital of the company is a liability, so it has a default credit balance. When all incomes and gains are credited, you increase the capital and by debiting expenses and losses, you decrease the capital. This is specifically what needs to be done for the system to stay in balance.

ALSO READ: Commonly used accounting acronyms And their Meaning

Conclusion

The 3 Golden rules of accounting is the foundation for preparing financial statements. A business must record every transaction according to these golden rules. You must first record each transaction as a journal entry before posting it to the ledger. Therefore, you must know the golden rules of accounting for bookkeeping purposes.