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Golden Rules of Journal Entries

Types of accounts

To understand the Golden Rules of Accounting we must first understand the types of accounts.

There are three types of accounts:

  • Real Account
  • Personal Account
  • Nominal Account

Real Account is a ledger account relating to Assets and Liabilities other than people accounts. These are accounts that don’t close at year end and are carried forward.  

Personal account is a ledger account connected to all persons like individuals, firms and associations.

Nominal account is a ledger account pertaining to all income, expenses, losses and gains.  

 Golden rules of accounting

Looking at the nature of all the accounts,  the accounting rules have been framed. For each account there is a set of Golden Rules and hence there are three Golden Rules of

Accounting

Illustration

An entity named Golden eggs Ltd. has the following transactions.

  1. It deposits Rs.12000 into Bank
  2. It buys goods worth Rs.55,000 from Sansung Ltd.
  3. It sells goods worth Rs.45,000 to Melon  Ltd.
  4. It pays Rs.18,000 as Rent for its premises
  5. It earns Rs.5,000 as interest on bank account.  

First of all, let us identity the accounts involved in these transactions and classify them into the different types of accounts:

TransactionAccounts involvedType of Accounts
Deposit Rs.12,000 in BankBank Account 
Cash Account
Real Account
Real Account
Purchase goods worth Rs.55,000 from Samsung Ltd.Purchase Account 
Samsung Ltd. Account
Nominal Account 
Personal Account
Sale of goods worth Rs. 45,000 to Melon Ltd.Sales Account 
Melon Ltd. Account
Nominal Account 
Personal Account
Pays Rs.18,000 as rentRent Account
Bank Account
Nominal Account 
Real Account
Earn Rs.5,000 as interest on Bank accountInterest received 
Bank Account
Nominal Account 
Real Account


Now applying the golden rules to each of the transactions we will get the following journal entries :

  • Deposit Rs.12,000 in Bank

Both Bank and Cash are real accounts and so the Golden rule is:

  • Debit what comes into the business
  • Credit what goes out from the business

So the entry will be:

Bank A/CDr.12,000 
    To Cash A/ C  12,000
  • Purchase goods worth Rs.55,000 from Samsung Ltd.

The Purchase Account is a Nominal account and the Creditors Account is a Personal account.

Applying Golden Rule for Nominal account and Personal account:

  • Debit the expense or loss
  • Credit the giver

The entry will be:

Purchase A/CDr   55,000 
    To Samsung Ltd. A/C  55,000
  • Sale of goods worth Rs.45,000 to Melon Ltd.

The sale account is a Nominal account and the Debtors Account is a Personal account.

Hence the Golden Rule to be applied is:

  • Debit the receiver
  • Credit the income or gain

Thus the entry will be:

Melon Ltd. A/CDr45,000 
    To Sales A/C  45,000
  • Pays Rs.18,000 as rent

Rent is a Nominal account and Bank is a real account.  

The Golden Rule to be applied is:

  • Debit the expense or loss
  • Credit what goes out of business

The entry thus will be:

Rent A/CDr.18000 
    To Bank A/C  18000
  • Earn Rs.5,000 as interest on Bank Account

Interest and Bank are Nominal account and Real Account.

The Golden rule to be applied is:

  • Debit what comes into the business
  • Credit the income or gain

Hence the entry will be:

Bank A/CDr5,000 
    To Interest Received A/C  5,000

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