3 Golden Rules of Accounting With Examples

Behind a solid financial record or report lies the 3 golden rules of accounting. Now, what exactly are those? And how do these help to ensure transparency and trust in every transaction?

No doubt, every finance and commerce student or finance expert must know and understand the golden rules of accounting that build the basis for a double-entry accounting system, ensuring the proper recording of all financial transactions. 

In this article, we shall look into the 3 golden rules of accounting with examples to show how they are essential for upholding financial honesty. 

What are the golden rules of accounting used for?

The classification of transactions into personal, real and nominal accounts is guided by these principles. These rules ensure that the amounts debited from a given account are equal to those credited in the same account, thus resulting in accuracy in financial accounting. They are as follows:

1. Debit the receiver, credit the giver (personal account rule).
2. Debit what comes in, credit what goes out (real account rule).
3. Debit all expenses and losses, credit all incomes and gains (nominal account rule).

You can also read: Accounting vs. Finance: Which one’s right for you?

Now, we are going to discuss these 3 golden rules of accounting using some examples.

Golden Rule #1. Debit the receiver, credit the giver

This covers personal accounts such as individuals’ or companies’ names on whose behalf the business deals with others.

Explanation:-

When an individual’s account is involved with another person’s account during any transaction, it means that the person who is being paid benefits, and so they receive the money. Hence, the individual’s personal account is debited while the other one pays. Therefore, credit is done.

Example:-

If you borrowed INR 5000 from a friend, here’s how the transaction would reflect:

• Debit: Your account (the one that received cash)
• Credit: Friend’s account (the one who gave the cash)

The prime objective of this rule is to maintain credibility between parties.

Golden Rule #2. Debit what comes in, credit what goes out

This involves real accounts which trace physical as well as intangible assets like cash, equipment, and goodwill.

Explanation:-

Assets get debited when they come into the organization, and when they leave it, they’re credited.

Example:-

For example, if your company bought INR 1000 worth of furniture, this is what the transaction would mean:

• Debit: Furniture account (asset coming in)
• Credit: Cash account (asset going out)

It helps businesses know what assets are coming in or going out, thus improving communication.

Golden Rule #3. Debit all expenses and losses, credit all incomes and gains

Nominal accounts include income, expenses, and gains.

Explanation:-

Expenses reduce equity and, henceforth, are debited, while incomes increase equity. Hence, they are credited.

Example:-

Suppose over that period, your business made sales worth INR 2000 but spent INR 5000 on electricity. This would show up as:

• Debit: Electricity account (expense)
• Credit: Sales account (income)

This ensures that the 3 golden rules of accounts maintain balance in the financial statements reflective of the actual financial position.

The importance of mastering the golden rules of accounting

Compliance with these ‘golden rules’ facilitates:

• Accuracy — Helps to record all transactions accurately. Instances where financial statements are deemed as effective.

• Constructive actions — It is important for one to adhere to such principles.

This can form a good basis for pursuing higher-level accounting practices.

Online Manipal: Your partner in mastering accounting concepts

For those yearning for knowledge on these golden rules of accounts, there is no better way than taking structured courses. Online Manipal offers highly ranked programs from reputable universities operating under the umbrella of Manipal Group, including Manipal University Jaipur (MUJ).

Relevant courses:

1. Online BBA in Finance and Accounting — This program, entitled by the UGC, is by MUJ. It is intended for those who seek profound knowledge of financial management, taxation, and auditing. The course is perfect for those interested in going deeper into the simple golden rules of accounting and wish to apply these to businesses and MNCs.

2. Online BBA — The program focuses on areas such as finance and marketing, among others and provides an opportunity for learners to take electives suiting their future careers.

By providing flexibility in learning from an experienced faculty, Online Manipal’s online finance degrees ensure that learners gain the practical skills necessary to apply these golden rules of accounts in real-world contexts.

The bottom line

Therefore, the 3 golden rules of accounting are characterized by precision, honesty and confidence in financial reportage. For students, business persons or accountants, one cannot do without grasping these principles of handling financial records.

For those who wish to improve their accounting skills and combine their theoretical knowledge with practical application, Online Manipal provides various degree programs. So, without wasting more time, begin your journey into accounting and finance mastery through our various online courses. Start investing for tomorrow’s prosperity now!

Unlock opportunities with our top online degree programs

Bachelor’s Degree	Master’s Degree
Bachelor of Computer Applications (BCA)	Master of Business Administration (MBA)
Bachelor of Business Administration (BBA)	Master of Computer Applications (MCA)
Bachelor of Arts (BA)	MSc in Data Science (MSc-DS)
Bachelor of Commerce (BCOM)- MUJ	Master of Commerce (MCOM)
Bachelor of Commerce (BCOM)- SMU	Master of Arts in English (MA)