Three Golden Rules of Accounting & Examples

An organization must track its accounts accurately based on golden rules of accounting to have a good understanding of its financial condition. The organization must record all its transactions under appropriate accounts to do so.

If an investor or third party wants to take a look at the company’s finances, it will head to the Book of Accounts, in which different expenses are assorted in different accounts. Special attention must be paid to all the accounts to ensure that all the transactions are recorded, and accounts are maintained uniformly.

Three rules are often referred to, which are known as the golden rules of accounting. These golden rules dictate how a journal entry is to be made. However, to understand these rules, we must understand the different types of accounts utilized to journal transactions.

1. Different Types of Accounts
2. Three Golden Rules of Accounting
3. Some Examples To Help Understand The Three Golden Rules of Accounting
4. Now let us classify these transactions under appropriate accounts

Different Types of Accounts

There are three different types of accounts used to classify transactions in different types of ledgers. Any transaction made by an organization will fall into one of these three accounts, on the basis of golden rules of accounting:

1. Real Account

A real account lists all the assets and liabilities of an organization that do not close by the end of the year. These accounts carry forward to the next year, and an example of such an account would be a Bank account. At the end of a year, the amount in a real account acts as the beginning balance for the next year. This account keeps track of assets, liabilities, and equities.

2. Personal Account

It is a general ledger account associated with different persons, associations, and firms. A creditor account can be taken as an example of the same. Suppose a company buys goods from another company, XYZ, worth Rs. X, the Company XYZ is credited, and the purchase account will be debited, which means its value will increase, according to golden rules of accounting.

3. Nominal Account

A nominal account can be referred to as a general ledger account that contains information regarding profits, losses, expenses, and gains. An interesting account can be taken as an example of Nominal accounts. A nominal account is essentially the opposite of a real account. Nominal accounts are temporary and are closed at the end of every year. The remaining balance is transferred from this temporary account to the company’s income statement. 

Three Golden Rules of Accounting

Companies need to employ staff with a good understanding of what is to be debited in an account and what is to be credited. However, this still leaves space for error and improvement. However, little errors can cause much trouble and lead to an imbalance in the ledgers.

This can be automated with the help of accounting softwares. ProfitBooks is one such software that provides accurate bookkeeping services for organizations on all sides. However, if you handle the accounting responsibilities for your company or if you own a business, you must understand the three golden rules of accounting.

A better understanding of debit and credit and these rules can allow you to enforce uniformity in your accounts. The three golden rules of accounting can be stated as follows:

1. Debit the One that has Received and Credit the One That has Given

One must follow this rule if a personal account is involved in the transactions. If a person is a giver and an organization is a receiver, the person must be credited in the general ledger. The account that is debited value increases, while the one credited has its value decreased.

2. What Comes in Must be Debited, and What Goes Out Must be Credited.

The second principle is used for real accounts, and it consists of tangible assets which exist physically. Examples of assets recorded in a real account include land, office buildings, machinery, vehicles used for transporting products, etc. These assets possess a debit value by default, and when this account is debited, the balance of this account is increased. Similarly, when a real account is credited, the balance decreases. According to golden rules of accounting, such an account is credited when a tangible asset is sold or commissioned out of use by an organization. Therefore, in the case of real accounts, a debit signifies an increase in the balance of the account, while a credit signifies a decrease in balance.

3. Every Loss or Expense is Debited, and Every Gain or Income is Credited

This principle is followed in the case of a nominal account, which records expenses, losses, gains, and income. The capital held by an organization is a liability, which implies that the default balance of these accounts is credit. The third, and last golden rule that you need to understand, explains that upon crediting all gains and income on an account, the value of the mentioned account will increase. At the same time, that in case of debiting all losses and expenses lowers the value of the account. Thus, credit signifies increment, and debit signifies decrement of balance in nominal accounts.

How new transactions are recorded over ProfitBooks

Some Examples To Help Understand The Three Golden Rules of Accounting

Let us explain the scenario of a company making purchases and profits, and paying rents and salaries, and classify them with the help of the following tables:

Now let us classify these transactions under appropriate accounts

• Capital worth Rs. 2,00,000 that the business started with

• Office rented for Rs 30,000

• Goods worth Rs 30,000 purchased from Company ABC on credit

• Goods worth Rs 60,000 sold

• Paid Company ABC for goods bought on credit in cash

• Salary paid for Rs 60,000 in cash

Possessing knowledge regarding the three golden rules of accounting can help in certain instances. However, it is not necessary for you to be an expert in this field, in order to enable healthy bookkeeping practices in your company. You can use certain tools in the market that are meant to help perform accurate bookkeeping in companies.

 However, the majority of tools and applications do not handle all aspects of Bookkeeping. This creates a requirement of several tools, which can get quite hectic and expensive for businesses. However, some tools are capable of handling all the accounting needs of businesses.

ProfitBooks is one such application, and has been created to handle every facet of accounting. ProfitBooks automates all the repetitive tasks, and performs the bookkeeping procedures necessary to handle the financial aspects of your business! 

Let ProfitBooks handle your bookkeeping processes, and provide you with accurate books every month! It has a zero learning curve and is very affordable for startups, and growing businesses.

With ProfitBooks, business owners do not need to know the rules of accounting as the application automatically takes care of it in the background.

Accurate and faster recordkeeping can help companies stay organized and crack deals easily. Find out how ProfitBooks can help you with your accounting needs!  Create your account for free today.

Also read:-

• Accounting Vs Bookkeeping
• How To Close The Books For an Accounting Period?
• What Is an Accounting Journal?
• What is a Ledger in Accounting?
• How to do Accounting for Small Business
• 5 Accounting Tips for New Entrepreneurs
• Top 6 Free Accounting Software For Small Business

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