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Table of Contents

  1. Introduction

  2. What Are the Golden Rules of Accounting?

  3. How Do Golden Rules of Accounting Work in Journal Entries?

  4. The Role of Golden Rules in Preparing a Balance Sheet

  5. Modern Accounting and the Golden Rules

  6. FAQs: Golden Rules of Accounting

  7. Conclusion

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Golden Rules of Accounting: A Complete Guide with Examples

04 July 2025 · Sachin Gadekar


Understand the three golden rules of accounting, their application in journal entries, and how they help maintain accurate financial records for any business.

Introduction

At Ultra, we believe a strong understanding of basic financial principles helps you make smarter investment and business decisions. One such essential concept for anyone managing finances — whether for a small business, startup, or large company — is the Golden Rules of Accounting.

The three golden rules form the foundation of double-entry bookkeeping. They help ensure that every financial transaction is recorded correctly and systematically.

In this guide, you’ll learn what the golden rules are, how they apply to different account types, how they guide journal entries, and why they still matter in modern accounting.

What Are the Golden Rules of Accounting?

The golden rules of accounting are time-tested principles used to record and classify every business transaction. They are grouped under three categories based on the type of account:

  • Personal Account

  • Real Account

  • Nominal Account

Let’s break down each rule.

1. Personal Account

Rule: Debit the receiver, credit the giver.

Meaning: This rule applies to accounts related to individuals, firms, or organizations. When someone receives value, their account is debited; when someone gives value, their account is credited.

Example:

If your business pays rent to a landlord:

  • Debit Rent Expense (receiver)

  • Credit Cash/Bank (giver)

Or, if you receive payment from a customer:

  • Debit Bank Account (receiver)

  • Credit Customer Account (giver)

2. Real Account

Rule: Debit what comes in, credit what goes out.

Meaning: Real accounts deal with assets — both tangible and intangible. When an asset enters the business, you debit it; when it leaves, you credit it.

Example:

  • When you purchase office furniture:

  • Debit Furniture Account (what comes in)

  • Credit Cash/Bank Account (what goes out)

3. Nominal Account

Rule: Debit all expenses and losses, credit all incomes and gains.

Meaning: Nominal accounts include all income, expenses, profits, and losses. Expenses and losses are always debited, while incomes and gains are credited.

Example:

If you earn interest:

  • Debit Bank Account (cash received)

  • Credit Interest Income Account (income earned)

If you pay an electricity bill:

  • Debit Electricity Expense (expense)

  • Credit Cash/Bank Account (payment made)

How Do Golden Rules of Accounting Work in Journal Entries?

Journal entries are the first step in recording any business transaction. The golden rules guide whether to debit or credit an account to maintain a balanced record.

Example for each type:

  • Personal Account: Paying a supplier — Debit Supplier Account (receiver) and Credit Bank Account (giver).

  • Real Account: Buying a computer — Debit Computer Account (comes in), Credit Cash Account (goes out).

  • Nominal Account: Paying salaries — Debit Salary Expense (expense), Credit Cash Account (payment).

These rules ensure that every transaction keeps the books balanced, forming the backbone of double-entry accounting.

Why Are Golden Rules Still Relevant?

Today, modern businesses use advanced accounting software like Tally, Zoho Books, or QuickBooks. But no matter how advanced the system, the fundamental logic still follows these golden rules.

Automation reduces manual errors but does not change the principle: every debit must have a matching credit.

The Role of Golden Rules in Preparing a Balance Sheet

The golden rules directly influence your balance sheet. Here’s how:

  • Real Accounts record tangible and intangible assets (like cash, equipment, inventory) and liabilities. They form the backbone of the balance sheet.

  • Nominal Accounts capture your profit or loss, which ultimately affects retained earnings in the equity section.

  • Personal Accounts impact accounts receivable and payable, which are also reflected in the balance sheet.

So, the golden rules ensure that your financial statements accurately show the company’s financial health.

Modern Accounting and the Golden Rules

Today, accountants rely on software for speed and accuracy, but understanding the 3 golden rules of accounting is still vital. If you’re preparing for accounting exams, managing a small business, or simply looking to improve your financial literacy, knowing these rules will help you read and maintain your books confidently.

Golden Rules of Accounting with Examples for Students

Many finance and commerce students learn these rules as part of their first lessons. Practical examples make them easy to understand and apply in real-world scenarios.

For instance:

  • Receiving loan funds: Debit Bank Account (money in), Credit Loan Account (liability).

  • Paying office rent: Debit Rent Expense (expense), Credit Bank Account (payment out).

  • Earning commission: Debit Bank Account (cash in), Credit Commission Income (income).

FAQs: Golden Rules of Accounting

1. What are the three golden rules of accounting?

The three golden rules are:

Debit the receiver, credit the giver (Personal Account).

Debit what comes in, credit what goes out (Real Account).

Debit all expenses and losses, credit all incomes and gains (Nominal Account).

2. How do golden rules apply to journal entries?

The golden rules help decide which accounts to debit or credit, ensuring every transaction is accurately recorded and balanced.

3. Why are golden rules important in accounting?

They form the basis for double-entry bookkeeping, which ensures that your books stay balanced and error-free.

4. Do modern accounting systems still use golden rules?

Yes. Even automated software uses these rules in the background to process every transaction correctly.

5. How do golden rules affect the balance sheet?

The rules determine how transactions impact assets, liabilities, and equity, which shape your balance sheet.

Conclusion

The golden rules of accounting are timeless principles that ensure financial transactions are recorded accurately. Whether you’re running a small startup, managing personal finances, or planning investments through Ultra, these rules help you maintain clarity and control.

For more expert insights on finance, investments, and accounting basics, keep reading our blogs at Ultra. Stay informed, invest smarter.

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