Golden Rules of Accounting

Understanding Debit and Credit just got Easier
Golden Rules of Accounting
Example of the Golden Rules of Accounting

Understanding Debit and Credit just got Easier

Got stuck in figuring what to Debit and Credit? Yes, like some of you, even I used to get puzzled as well in my early days. By the time I would settle my understanding on golden rules of accounting: debit and credit, one or the other scenarios would again lead me back to zero and start my understanding afresh.

After following some of logics below, I settled my understanding on debit and credit and after that, I got it right every time. Let’s clear the confusion once and for all!

Instead of beginning with golden rules of accounting, let me register debit and credit as shown in the table.

Debit	Credit
Positive (+)	Negative (-)
Come	Go
Receive	Give
Receiver	Giver
Deposit	Withdraw
Increasing	Decreasing

From the above table, it’s clear that it is neither a theory nor a puzzling topic anymore - it’s just logic and reasoning. To summarize - Debit is all about incoming/deposits and Credit is all about outgoing/withdrawal.

For example, you purchased a computer by paying 25,000 by cash. Here, you are receiving a computer so it should be debited, and cash should be credited since it is going out.

Voila! You just recorded an accounting transaction even without looking at the golden rules of accounting.

With the above understanding, let us introduce the golden rules of accounting. Golden rules of accounting refer to a set of pre-defined principles which guides the sequential way of recording the transactions using double entry system of bookkeeping.

*Golden Rules of Accounting*
	*Real Account*	*Personal Account*	*Nominal Account*
*Debit*	What Comes In	The Receiver	All Expenses & Losses
*Credit*	What Goes Out	The Giver	All Income & Gains

Looks bookish? Let us make it simpler with What, Who and Why -

	What (Real)	Who (Personal)	Why (Nominal)
Examples	Goods, Furniture, Money	Firm, Person, Company	Interest, Commission, Discount
Debit	Comes In	Receiver	For expenses
Credit	Goes Out	Giver	From Income

Any scenarios of accounting entry must fall under any of these three broad categories – What (Real), who (Personal) and Why (Nominal). So basically, it covers why (Nominal) a transaction has happened; what (Real) commodities are coming in or going out and who (Personal) is receiving or giving.

Going by this logic, the above transaction of computer purchase in simple language becomes –

Received What?
Computer, hence debited

Paid What?
Cash, hence credited

Let’s take one more example to be sure about it. Paid electricity bill of 5,000 in cash.

Why money has been paid?
For Electricity expenses, hence debited.
Paid What?
Cash, hence credited

Next time you are confused about debit and credit, just remember ‘What, Who and Why’

Types of Accounts

For all those who are still curious to know the definition of a real account, personal account and nominal account, here is the brief about it.

Account Type	Definition	Examples
Real Account	Real accounts are those accounts which are related to assets or properties or possessions. It includes both tangible and intangible.	Plant and Machinery, Stock, Cash, Vehicle, Goodwill, Trademark, Patents & Copyrights, Intellectual Property Rights etc.
Personal Account	This includes all accounts related persons consist of natural, artificial and representative accounts.	Mr Ram’s a/c, A&B Bros trading a/c, salary payable etc.
Nominal Account	Nominal accounts are those accounts that are related to expenses or losses and incomes or gains.	Wages, Salaries, Rent, Travelling Expenses, Commission received, Loss by fire etc.

What are the three golden accounting rules?

The three golden rules of accounting apply to different types of accounts and the rules are as follows.

Debit the receiver and credit the giver

This golden rule applies to the personal account. When the business receives something, then the account must be debited and when the business gives something then the account must be credited as per this rule of accounting.

Debit what comes in and credit what goes out

This golden rule applies to real accounts (also known as permanent accounts). Examples of real accounts include equity, asset, and liability accounts. When the business is acquiring something such as an asset, then the account of the business has to be debited. On the other hand, when the business is giving something out then the account will be credited.

Debit expenses and losses, credit income and gains

This golden rule applies to nominal accounts (also known as temporary accounts). Examples of nominal accounts include expense, gain, loss, and revenue accounts. As per the rule, when the business incurs a loss or has an expense then you need to debit the account. If the business has a gain or earns an income then the account should have a credit.

Example of the Golden Rules of Accounting

In the below example, we have listed different type of transactions along with the type of accounts and details of debit/credit after applying the accounting rules.

Sl No.	Accounting Transaction	Accounts Involved	Type of account	Debit/ Credit
1.	Mr Sham started a business with Rs.60,000 cash.	Cash A/c Capital A/c	Real Personal	Debit what comes in Credit the giver
2.	Purchased goods for cash 25,000 Tk	Purchase A/c Cash A/c	Real Real	Debit what comes in Credit what goes out
3.	Sold goods for cash 20,000 Indo Rupiah	Cash A/c Sales A/c ( Inventory sold )	Real Real	Debit what comes in Credit what goes out
4.	Purchased goods from Mr Bhasha for cash 10,000 dirham	Purchase A/c (Inventory Purchased) Cash A/c	Real Real	Debit what comes in Credit what goes out
5.	Sold goods to Mr Sam 8,000 KES on credit.	Mr Sam A/c Sales A/c ( Inventory sold )	Personal Real	Debit the receiver Credit what goes out
6.	Purchased furniture for Rs.6,000	Furniture A/c Cash A/c	Real Real	Debit what comes in Credit what goes out
7.	Paid rent 1,500 Tk	Rent A/c Cash A/c	Nominal Real	Debit expenses Credit what goes out
8.	Paid wages 10,000 Indo rupiah from Bank	Wages A/c Bank A/c	Nominal Real	Debit expenses Credit what goes out
9.	Purchased goods from Ali Ltd on credit	Purchase A/c ( Inventory purchased ) Ali Ltd	Real Personal	Debit what comes in Credit the giver
10.	Dividend received in cash	Cash A/c Dividend	Real Nominal	Debit what comes in Credit income
11.	Salary outstanding	Salary A/c Salary Outstanding A/c	Nominal Representative personal	Debit expenses Credit the representative personal account

What are modern rules of accounting?

The modern rules of accounting have six types of accounts rather than the three types of accounts in the traditional rules of accounting. As per the modern rules, the six accounts are an asset, capital, drawings, revenue, liability, and expense.

You have to debit the increase while you credit the decrease for the asset account. For liability, you credit the increase and debit the decrease. You debit the decrease and credit the increase for a capital account. For the revenue account, you debit the decrease and credit the increase. For the drawings account, you debit the increase and you credit the decrease. You debit the increase and you credit the decrease for the expense account.

FAQ:

Why is the receiver debited and the giver credited?

Let us say that a business called A sells an asset to another business called Z. The business Z has received the asset but is yet to pay. The asset has been sent from A at this point although A has not received the payment from Z yet. The receiver is debited because he is going to pay business A eventually while business A is credited because it will receive the payment from Z in due time.

Which accounting standard is applicable as per Section 133, of the Companies Act, 2013?

According to section 133 of the Companies Act, 2013, the Indian Accounting Standards (Ind AS) are applicable. It states that these accounting standards have been developed according to the Indian environment, both legal and economic. Eventually, the Ind AS will align with IFRS (International Financial Reporting Standards) meaning it will follow its lead either partially or fully.

What are the 3 types of accounts?

The three different types of accounts in accounting are Real, Personal and Nominal Account.

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