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What are Three Golden Rules of Accounting?

Three Golden Rules of Accounting

One of the most famous and commonly used terms in the field of accounting and finance is “Three golden rules of accounting”. These rules are used to prepare an accurate journal entry which forms the very basis of accounting and act as a cornerstone for all bookkeeping.

They are also known as the traditional rules of accounting or the rules of debit and credit.

Three Golden Rules of Accounting Infographic

 

Easy Interpretation of 3 golden rules of accounting

  • Real Account

If the item (real account) is coming into the business then – Debit

If the item (real account) is going out of the business then – Credit

  • Personal Account

If the person(or)legal body(or)group is receiving something – Debit

If the person(or)legal body(or)group is giving something – Credit

  • Nominal Account

If it is an expense or loss for the business – Debit

If it is an income or gain for the business – Credit

While making a journal entry there are essentially three types of accounts i.e. Real, Personal and Nominal. Each account has a specific rule that needs to be applied and it is utmost important to identify the account correctly for proper application of the three golden rules of accounting.

 

Examples – Three Golden Rules of Accounting

  • Purchased furniture for 10,000 in cash.
Accounts Involved Debit/Credit Rule Applied
Furniture A/C 10,000 Real A/C – Dr. what comes in
 To Cash A/C 10,000 Real A/C – Cr. what goes out  

 

  • Paid 15,000 cash to Unreal Pvt Ltd.
Accounts Involved Debit/Credit Rule Applied
Unreal Pvt Ltd. A/C 15,000 Personal A/C – Dr. the receiver
 To Cash A/C 15,000 Real A/C – Cr. what goes out  

 

  •  Paid 18,000 from the bank for rent.
Accounts Involved Debit/Credit Rule Applied
Rent A/C 18,000 Nominal A/C – Dr. all expenses
 To Bank A/C 18,000 Personal A/C – Cr. the giver  

 

  • Depreciation charged for 1,00,000 on the machine.
Accounts Involved Debit/Credit Rule Applied
Depreciation A/C 1,00,000 Nominal A/C – Dr. all expenses
 To Machine A/C 1,00,000 Real A/C – Cr. what goes out  

 

  • Goods sold for 5,000 on credit to Mr Unreal.
Accounts Involved Debit/Credit Rule Applied
Mr Unreal A/C 5,000 Personal A/C – Dr. the receiver
 To Sales A/C 5,000 Nominal A/C – Cr. all incomes 

Related Topic – How to Prepare a Journal Entry (Step by Step)?

 

Rules of Debit and Credit According to Modern Approach

If you are posting an entry in the journal, you may use the Modern Accounting Approach instead of three golden rules of accounting.

You should try to use the American or modern rules of accounting to compare and find out which one suits your learning style and is easy to apply. It is true that some people find the modern approach easier than the traditionally used three golden rules of accounting.

Modern Rules

 

Example – Modern Rules of Accounting

  • Received cash 3,000 as rent from Unreal Pvt Ltd.
Accounts Involved Debit/Credit Modern Rule Applied
Cash A/C 3,000 Asset A/C – Dr. the increase
 To Rent A/C 3,000 Revenue A/C – Cr. the increase  

 

Short Quiz for Self-Evaluation

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>Read What are Accounting Concepts?


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