Golden Rules of Accounting: Basics, Types of Accounts & Examples

Financial accounting runs on the 3 golden rules of accounting. Following these rules ensures uniformity in recording the financial transactions, popularly known as bookkeeping. Another concept that influences financial accounting is debit and credit. 

Let us read more about the golden rule of accounting and other concepts in detail. 

What Are the Golden Rules of Accounting? 

Below table represents the three golden rules of accounting.

Let us understand three Golden Rules of Accounting in detail.

Rule 1:  “Debit what comes in - credit what goes out.” 

This rule applies to real accounts, including tangible assets like buildings, machinery, furniture, land, etc. By default, they have a debiting balance and debit everything that comes in, adding them to the existing account balance. 

Example: Furniture Purchased (paid in cash)

Rule 2:  “Credit the giver and debit the receiver.”

This rule applies to personal accounts; when a natural or artificial entity makes a payment to a company, it is recorded as an inflow. However, the receiver must be debited, and the company receiving the payment must be credited in the accounts. 

Example: Loan Received From Bank 

Rule 3:  “Credit all income and debit all expenses.”

This rule applies to nominal accounts. According to this rule, a company’s capital is considered as liability and has a credit balance. As a result, the capital will increase if all earnings and profits are credited. All the losses and costs will be deducted, and the capital will decrease.

Example:  Sales Revenue

Rent Paid 

Types of Accounts in Accounting

Following are three types of accounts in accounting: 

• Personal Account

 A personal account includes individuals, associations, and companies. A personal account can further be subcategorized into an artificial personal account, natural personal account, and representative personal account. 

An artificial personal account includes hospitals, government bodies, companies, partnerships, etc. A natural personal account includes a capital account, creditors, a drawing account, debtors, etc. A representative personal account includes a group of persons or a particular person.

• Nominal Account

A nominal account is a normal ledger account that contains the temporary transactions such as incomes, profits, expenses, and losses for a specific period. At the beginning of the next fiscal year, the balances are reset to zero. Salary accounts, commission received, rent account, and interest account are examples of nominal accounts. 

• Real Account 

All assets and liabilities are recorded under real account. Further, assets are categorised into tangible and intangible assets. Furniture, buildings, land, machinery, etc, are included in tangible assets. On the other hand, goodwill, patents, copyrights, etc., are recorded as intangible assets. These accounts are carried forward into the next fiscal year.

Benefits of the Golden Rules of Accounting 

The following are the benefits of the golden rule of accounting: 

• Accuracy: Following the golden rules of accounting helps maintain consistent and accurate records, minimizing any mistakes and discrepancies. 

• Analysis: The golden rules of accounting allow businesses to analyse their financial health, helping in better decision-making.

• Financial Planning: Using the golden rules of accounting, you can easily plan your budget, allocate resources, and estimate future finances. 

• Minimizes Fraud: You can easily detect differences in the financial records and minimize the risk of fraud. 

• Simplify tax calculation and filing: Accurate accounting records simplify tax calculation and filing, reducing the risk of errors and penalties.

Fundamentals of the Golden Rules of Accounting 

Following these fundamentals helps in a standardized approach to accounting. Here are the fundamentals of the golden rules of accounting: 

• Consistent: To ensure comparability, you must consistently follow the financial practices and reporting methods across all accounting periods. 

• Relevant: You must ensure all the accounting information is relevant to the decision-making process of stakeholders. 

• Reliable: Financial data should be reliable, accurate, and verifiable, ensuring stakeholders can trust the information presented.

• Accrual Principle: You must record revenues and expenses when they are earned or incurred, not when the cash is received or paid.

• Going Concern Principle: You must assume that the business will continue to operate indefinitely unless there is evidence to the contrary.

• Matching Principle: Expenses must be matched with the revenue they help generate to ensure an accurate profit calculation for a given period

• Conservatism: You must record expenses and liabilities when they are certain but revenues only when they are assured. This avoids overstating financial positions.

Who Needs to Follow the Golden Rules of Accounting? 

According to the Rule of 6F of the Income Tax Act, if the receipts exceed ₹1.5 Lakhs in the previous three years. The following professions are required to maintain financial transaction records following the golden accounting rules:

• Legal
• Technical Consultation
• Architectural
• Engineering
• Accountancy
• Authorized Representation
• Film Artists
• Medical
• Interior Decoration
• Company Secretary