3 Golden Rules of Accounting

All things within a system function more effectively, and that is the prime goal behind the 3 golden rules of accounting. Both golden rules and modern rules of accounting help track and maintain financial transactions more efficiently.

When it comes to accounting, there are two primary components that you see most often - credit and debit. However, given the weightage of these two components, understanding how to account for them without the tedious bookkeeping procedures is necessary.

Thus, to simplify the accounting process of credit and debit, here are the 3 golden rules to follow and the account type they apply to.

Account	Inclusions in Account	Golden Rule
Personal Account	Real person a/c - Rajesh, Sunita, etc.	Credit the Giver,
Personal Account	Artificial person a/c - Banks, hospitals, etc.	Debit the Receiver
Personal Account	Representative a/c - prepaid expenses, outstanding expenses, etc.
Real Account	Tangible business assets - land, machinery, investments, etc.	Credit what goes out,
Real Account	Intangible business assets - trademarks, licences, patients, etc.	Debit what comes in
Nominal Account	All accounts related to income, expenses, gains, and losses	Credit all Income,
Nominal Account	e.g. sales account, salary account, electricity account, etc	Debit all Expenses

The 3 golden rules of accounting individually apply to one of the real, nominal, and personal accounts. These rules help distinguish between different account entries for a more systematic calculation. To understand this better, let us look at the 3 golden rules of accounting with examples below.

Credit the Giver and Debit the Receiver: Personal Accounts

You purchase supplies for your bakery business for ₹15,000 from company Y. To add this entry to your books, as per the golden rule of crediting the giver and debiting the receiver, this is how you will do it:

• You will be required to debit your purchase account by ₹15,000 as you are the receiver.

• On the other hand, you will simultaneously credit ₹15,000 for company Y, as they supplied the requirements, making them the giver.

Here is what it will look like:

Date	Account	Debit	Credit
xx-xx-xxxx	Purchase Account	₹15,000
	Accounts Payable Account (company Y)		₹15,000

Debit what comes in - Credit what goes out: Real Accounts

You bought new machinery worth ₹50,000 for your bakery in cash. To add this entry to your books, as per the golden rule of debit what comes in, credit what goes out, this is how you will do it. Since you purchased the machinery in cash, you will credit ₹50,000 to your cash account as the money is withdrawn. On the other hand, as the machinery is coming into the business, you will debit the same ₹50,000 from the machinery/ equipment account.

Date	Account	Debit	Credit
xx-xx-xxxx	Machinery Account	₹50,000
	Cash Account		₹50,000

Credit all Income and Debit all Expenses: Nominal Accounts

You paid the employees of your bakery a salary of a total of ₹1,00,000 for the month of January. To add this entry to your books, as per the golden rule of debit all expenses and credit all income, this is how you will do it. As the employee salaries account for an expense for the bakery, ₹1,00,000 will be debited from the company account. On the other hand, as salaries are credited to different employee accounts from the company, this income is credited to the employee salary account.

Date	Account	Debit	Credit
xx-xx-xxxx	Bakery Account	₹1,00,000
	Employee Salary Account		₹1,00,000

When it comes to accounting today, there are two primary ways to go ahead with it.

The first is the application of the 3 golden rules of accounting, as explained above. The other is to implement the modern rules of accounting that revolve around not 3 but 6 different types of transaction categories for financial reporting.

To understand the difference between these rules, check out the table below:

Factors	3 Golden Rules	Modern Rules
Purpose	Focuses on the account type between real, nominal, and personal for credit and debit calculation.	Focuses on the type of transaction - asset, capital, revenue, liability, withdrawal, and expense.
Key Focus	Recording transactions.	Preparing financial statements.
Scope	It is a traditional approach that is used universally.	It is an adaptive and evolved approach that provides detailed guidance and entry segregation.
Benefits	Promotes transparency and consistency for financial recording, making it easier to draw comparisons with competitors.	These rules are built on many accounting principles and thus help prepare accurate financial statements to support business performance.

• Accurate understanding and application of these golden rules in accounting can help with accurate business valuation. This will allow businesses to plan better and meet their future goals more efficiently.

• With precise credit and debit entries using the golden rules, the preparation speed of important financial documents will be higher and more accurate. Examples of these documents include cash flow statements, profit and loss statements, etc.

• The principles involved in the 3 golden rules of accounting are very straightforward and standardised. This ensures consistency in recordkeeping, with minimal risk of errors and gaps.

• These rules also lay a strong foundation for businesses when it comes to accounting, ensuring smoother adoption of the modern rules of accounting as a combination when it comes to statement preparation.

• Lastly, with accurate bookkeeping and proper differentiation between credit and debit values, businesses can benefit from effective decision-making for operational efficiency and expansion strategies.

Every business transaction today has two sides - credit or debit. Thus, understanding the 3 golden rules of accounting is necessary to adopt the various accounting principles step-by-step.

With the help of these rules, you will be able to record every financial transaction twice, one in credit and one in debit, ensuring reduced risks of errors and increased consistency and accuracy.

Therefore, to become well acquainted with the business language of accounting, one must know and remember how to apply these rules and principles for financial independence.

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