3 Golden Rules of Accounting - Types, Examples & more

Accounting is the process of measuring and recording all the financial transactions that happen in a financial year. It includes summarizing, analyzing, and recording the data. It helps in getting a clear picture of the financial position of the business by seeing the value of a company’s assets and liabilities.

Identifying and systematically recording accounting transactions in the appropriate books of accounts is known as bookkeeping. The Golden Rules of Accounting serve as the basis for recording all business transactions.

In this article, we will discuss the threeGolden Rules of Accounting along with their types and examples.

What are the Golden Rules of Accounting?

Financial transactions revolve around the system of dual entry. Every transaction affects at least two accounts, one is debited and the other one is credited. Golden Rules of Accounting provides the rules that help in identifying which account needs to be debited and which account needs to be credited.

All the accounts are classified into three major types; i.e., Personal, Real & Nominal under the Golden Rules of Accounting. It provides a set of three principles for these three accounts that allow proper recording of transactions in the books of accounts. According to the Golden Rules of Accounting, one needs to first determine the type of accounts affected by each transaction and then apply the principle to record transactions.

Types of Accounts

The 3 types of accounts are listed below:

1. Personal Account

Rule - "Debit the Receiver, Credit the Giver"

The accounts which relate to an individual, group of individuals, firm, company, or institute are considered to be personal accounts. There are three types of personal accounts:

• Natural Personal Account: Accounts of natural persons; i.e., accounts of particular human beings are considered in this. Example, Ram A/c, Mohan A/c, Creditors A/c, Debtors A/c, Drawings A/c etc.
• Artificial Personal Account: These accounts do not have the physical existence of a human being but a group of human beings working together is considered to be an Artificial Personal Account. For example, Company A/c, Partnership Firm A/c, Bank A/c, Club A/c etc. 
• Representative Personal Account: When an account represents a particular person or group of persons, then it is called a Representative Personal Account.

It implies that 'Debit the person's account who receives something from the business out of a transaction and Credit the person's account who gives something to the business'. 

2. Real Account

Rule - "Debit What Comes in, Credit What Goes out"

All the accounts whose value can be measured in monetary terms whether tangible or intangible which belong to the business are called Real Accounts. There are two types of real accounts:

• Tangible Real Accounts: The real accounts which can be touched, felt, measured, purchased, and sold. For example, Cash A/c, Stock A/c, Furniture A/c, Machinery A/c, etc. 
• Intangible Real Accounts: The real accounts which can not be touched but their value can be measured in terms of money. For example,Goodwill A/c, Patent A/c, Copyright A/c, Trademark A/c Etc. 

The rule specifies that any real account which comes into business is debited and any real account which goes outside the business is credited. 

3. Nominal Account

Rule - "Debit all the Expenses and Losses, Credit all the Incomes and Gains"

All the expenses and losses as well as all the incomes and gains come under Nominal Account. Expenses include Salaries Paid, Rent Paid, Discount Allowed, etc. and Incomes include Commission Received, Interest Received, Discount Received, etc. 

It implies that all the expenses and losses incurred in business are debited and all the income and gains should be credited. 

Example on Rules of Accounting

Classify the nature and types of nature of accounts for the following transactions:

1. Cash received from Sahil ₹10,000.
2. Rent Paid in Cash ₹500.
3. Purchased Machinery for ₹20,000 in Cash.
4. Paid Cash to Sayeba Enterprises ₹5,000.
5. Commission Received in Cash ₹1,000.

Solution:

Benefits of the Golden Rules of Accounting

The Golden Rules of Accounting offer numerous benefits. Here are some of them:

1. Clarity: By adhering to these rules, accounting transactions are recorded in a clear and consistent manner, making financial statements easy to understand.
2. Accuracy: The rules provide a structured approach to recording transactions, which helps in minimizing errors and maintaining accurate records.
3. Consistency: They enable consistency in recording financial transactions, ensuring comparable and reliable financial statements over time.
4. Decision Making: Accurate and consistent financial information allows management and stakeholders to make informed decisions based on the financial health of the organization.
5. Regulatory Compliance: Following these rules ensures compliance with accounting standards and regulations, helping avoid legal and financial penalties.
6. Financial Health Assessment: They help in accurately assessing an organization's financial health, aiding in effective financial planning and analysis.

Conclusion

In conclusion, the three Golden Rules of Accounting aresuper important for keeping financial records straight. They help make sure everything is recorded correctly and clearly. Knowing and using these rules helps accountants do their job well, making it easier for businesses to understand their finances, make smart decisions, and keep everyone's trust.

Simply put, the three Golden Rules of Accounting are key to doing accounting right and keeping financial information reliable and easy to use.