All You Need To Know About The 3 Golden Rules Of Accounting

One can not enter a transaction unless we are sure which account should be debited or credited. This is why knowing the golden rules of accounting is crucial. Keep reading to know more! Today's accounting goes much beyond bookkeeping. Debit and credit are two crucial components of accounting. Before fully knowing which account should be debited or credited, one cannot enter a transaction.

Before we dive into the 3 Golden Rules of Accounting, it is important that you refresh your memory on the three types of accounts:

• Real account, relating to assets and liabilities other than people accounts such as cash and goods.
• Personal account, related to all persons like individuals, firms and associations such as debtors and creditors
• Nominal account, related to all income, expenses, losses and gains such as rent and interest

Debit What Comes In, Credit What Goes Out

This golden rule is applicable to real accounts. When a company acquires something, such as an asset, the s account must be debited. When the company, on the other hand, gives something away, the account is credited.

Debit The Receiver, Credit The Giver

This golden rule relates to personal accounts. According to this accounting rule, the account must be debited when the business receives something, and when the business gives something, the account must be credited.

Debit all Expenses Credit all Income

This golden rule holds true for nominal accounts. When the company suffers a loss or incurs an expense, the account must be debited. If the company makes a profit or earns an income, the account should be credited.

Illustrating The Golden Rules of Accounting

Let's now look at the treatment of the following transaction:

Suppose Ram started a business with Rs. 50,000 by cash; the cash a/c is debited as it is an asset for the business, and the capital a/c is credited as it is a liability for the business according to the golden rules of accounting.

A Glimpse Into Modern Accounting

Instead of the three categories of accounts in the conventional rules of accounting, the modern rules of accounting comprises six types of accounts. The six accounts are asset, capital, drawings, revenue, liability, and expense.

• For an asset account, you must debit the increase and credit the decrease. You debit the decrease and credit the increase for liability.
• For a capital account, you debit the decrease and credit the increase.
• You debit the decrease and credit the rise for a revenue account.
• You debit the increase and credit the decrease for the drawing account.
• For an expenditure account, you debit the increase and credit the decrease.

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