Golden Rules of Accounting
The Golden Rules of Accounting are the basic rules used to decide which account should be debited and which account should be credited when recording a business transaction.
There are three Golden Rules, based on the three traditional types of accounts:
- Personal Account
- Real Account
- Nominal Account
A simple way to remember them is:
Personal → Receiver/Giver
Real → Comes in/Goes out
Nominal → Expenses/Losses and Income/Gains
1. Personal Account
Golden Rule:
Debit the Receiver, Credit the Giver
A Personal Account relates to a person, individual, company, organization, or other entity.
Examples of Personal Accounts
- Rahul’s Account
- Amit’s Account
- ABC Ltd. Account
- SBI Bank Account
- Supplier’s Account
- Customer’s Account
What does the rule mean?
When a person or entity receives something from the business, their account is debited.
When a person or entity gives something to the business, their account is credited.
Example 1: Paid ₹10,000 to Rahul
Suppose your business pays ₹10,000 to Rahul.
Here:
- Rahul is the receiver → Debit Rahul
- Cash is going out → Credit Cash
Journal Entry:
| Account | Debit | Credit |
|---|---|---|
| Rahul A/c | ₹10,000 | — |
| To Cash A/c | — | ₹10,000 |
Why?
Rahul receives ₹10,000, so Rahul’s Account is debited.
Cash is given by the business, so Cash is credited.
Example 2: Received ₹5,000 from Amit
Amit gives ₹5,000 to the business.
- Amit = Giver → Credit Amit
- Cash = Receiver → Debit Cash
Journal Entry:
| Account | Debit | Credit |
|---|---|---|
| Cash A/c | ₹5,000 | — |
| To Amit A/c | — | ₹5,000 |
Easy trick:
Personal Account → Person involved → Receiver gets Debit, Giver gets Credit.
2. Real Account
Golden Rule:
Debit What Comes In, Credit What Goes Out
A Real Account represents assets or properties owned by the business.
Real accounts can generally represent things that have value and can be owned by the business.
Examples of Real Accounts
- Cash
- Furniture
- Machinery
- Building
- Land
- Computer
- Vehicle
- Equipment
There are two broad types:
- Tangible Real Accounts — things you can physically see or touch, such as furniture, machinery and buildings.
- Intangible Real Accounts — assets without physical form, such as patents, copyrights and trademarks.
What does the rule mean?
When an asset comes into the business, debit it.
When an asset goes out of the business, credit it.
Example 1: Purchased furniture for ₹20,000 in cash
Furniture comes into the business.
Cash goes out of the business.
Therefore:
- Furniture → Debit
- Cash → Credit
Journal Entry:
| Account | Debit | Credit |
|---|---|---|
| Furniture A/c | ₹20,000 | — |
| To Cash A/c | — | ₹20,000 |
Why?
Furniture comes into the business → Debit Furniture.
Cash goes out → Credit Cash.
Example 2: Purchased a computer for ₹50,000 in cash
- Computer comes in → Debit Computer
- Cash goes out → Credit Cash
Journal Entry:
| Account | Debit | Credit |
|---|---|---|
| Computer A/c | ₹50,000 | — |
| To Cash A/c | — | ₹50,000 |
Easy trick:
Real Account → Asset → What comes in = Debit, What goes out = Credit.
3. Nominal Account
Golden Rule:
Debit All Expenses and Losses, Credit All Incomes and Gains
A Nominal Account relates to the income, expenses, gains and losses of a business.
Unlike real accounts, nominal accounts generally represent items that affect the profit or loss of the business.
Examples of Nominal Accounts
Expenses:
- Rent
- Salary
- Electricity
- Telephone expenses
- Advertising expenses
- Insurance
- Repairs
Losses:
- Loss on sale of machinery
- Loss due to theft
Incomes/Gains:
- Commission received
- Discount received
- Interest received
- Profit on sale of an asset
What does the rule mean?
If the business incurs an expense or loss, debit it.
If the business earns income or gains, credit it.
Example 1: Paid office rent ₹15,000
Rent is an expense.
Therefore:
- Rent → Debit
- Cash → Credit
Journal Entry:
| Account | Debit | Credit |
|---|---|---|
| Rent A/c | ₹15,000 | — |
| To Cash A/c | — | ₹15,000 |
Why?
Rent is an expense → Debit Rent.
Cash goes out → Credit Cash.
Example 2: Received commission ₹8,000
Commission received is income.
Therefore:
- Cash → Debit
- Commission → Credit
Journal Entry:
| Account | Debit | Credit |
|---|---|---|
| Cash A/c | ₹8,000 | — |
| To Commission Received A/c | — | ₹8,000 |
Why?
Cash comes into the business → Debit Cash.
Commission is income → Credit Commission Received.
Quick Comparison of the Three Golden Rules
| Type of Account | Golden Rule | Example |
|---|---|---|
| Personal Account | Debit the Receiver, Credit the Giver | Rahul, Amit, ABC Ltd. |
| Real Account | Debit What Comes In, Credit What Goes Out | Cash, Furniture, Machinery |
| Nominal Account | Debit All Expenses & Losses, Credit All Incomes & Gains | Rent, Salary, Commission |
Let’s Understand With One Transaction
Suppose ABC Business purchases furniture for ₹30,000 from Rahul on credit.
Let’s identify the accounts:
Step 1: Furniture Account
Furniture is an asset → Real Account.
Furniture comes into the business.
Therefore:
Debit Furniture ₹30,000
Step 2: Rahul’s Account
Rahul is a person → Personal Account.
Rahul gives furniture to the business.
Therefore:
Credit Rahul ₹30,000
Journal Entry
| Account | Debit | Credit |
|---|---|---|
| Furniture A/c | ₹30,000 | — |
| To Rahul A/c | — | ₹30,000 |
Why?
Furniture comes in → Debit
Rahul gives → Credit
Another Example Combining the Rules
Suppose the business:
- Pays salary ₹25,000
- Purchases machinery ₹1,00,000 for cash
- Receives commission ₹10,000
1. Salary paid
Salary = Nominal Account
Salary is an expense → Debit Salary
Cash goes out → Credit Cash
Entry:
Salary A/c Dr. ₹25,000To Cash A/c ₹25,000
2. Machinery purchased for cash
Machinery = Real Account
Machinery comes in → Debit Machinery
Cash goes out → Credit Cash
Entry:
Machinery A/c Dr. ₹1,00,000To Cash A/c ₹1,00,000
3. Commission received
Commission = Nominal Account
Cash comes in → Debit Cash
Commission is income → Credit Commission Received
Entry:
Cash A/c Dr. ₹10,000To Commission Received A/c ₹10,000
⭐ Easy Way to Remember
Think about the three questions:
👤 PERSONAL
Who is involved?
Receiver → Debit
Giver → Credit
🏠 REAL
What happens to the asset?
Comes in → Debit
Goes out → Credit
💰 NOMINAL
Is it an expense/loss or income/gain?
Expense/Loss → Debit
Income/Gain → Credit
One-line memory formula:
Personal → Receiver/Giver
Real → Comes In/Goes Out
Nominal → Expense/Loss & Income/Gain
These rules make it much easier to determine the Debit and Credit side of a transaction before preparing a journal entry.