Golden Rules of Accounting

Golden Rules of Accounting

Every entity must present its financial information to all its stakeholders.  The information provided in the financials must be accurate and present a true picture of the entity. For this presentation, it must account for all its transactions. Since economic entities are compared to understand their financial status, there has to be uniformity in accounting.

To bring about uniformity and to account for the transactions correctly there are three Golden Rules of Accounting. These rules form the basis of passing journal entries which in turn form the basis of accounting and book-keeping.

 Types of accounts

There are three types of accounts, every account/entry will fall into one of the following :

  • Real Account
  • Personal Account
  • Nominal Account

A Real Account is a general ledger account relating to Assets and Liabilities other than people accounts. These are accounts that don’t close at year-end and are carried forward. An example of a Real Account is a Bank Account. 

Personal account is a General ledger account connected to all persons like individuals, firms and associations. An example of a Personal Account is a Creditor Account.

Nominal account is a General ledger account pertaining to all income, expenses, losses and gains. An example of a Nominal Account is an Interest Account.

Golden Rules of Accounting

Type of Account

Rules

Real Account

Debit what comes in

Credit what goes out

Personal account

Debit the receiver

Credit the giver

Nominal account

Debit all expenses and losses

Credit all incomes and gains

 Conclusion

 All transactions of an entity must be accounted for. To account these transactions the entity must pass journal entries which will then summarise into ledgers. The journal entries are passed on the basis of the Golden Rules of accounting.  For accounting, if one does not know the golden rules, he cannot pass journal entries and hence won’t be able to accurately account for the transactions.

These lay the foundation of accounting and hence are called the Golden Rules of accounting.

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