Golden Rules of Accounting: Overview, Types & Benefits

Golden Rules of Accounting are the principle on which basis accounting works. These rules are important and essential for any business to maintain its financial records systematically. There are three major rules which should be followed while preparing the financial accounts of any business. In this blog, we will discuss these golden rules of accounting along with types of accounts and benefits of golden rules of accounting. 

Golden Rules of Accounting 

Recording and maintaining each financial transaction is essential for each individual and business. All these accounts and records are important for future decision making or we can consider accounting as the only support to run a business smoothly. However, accounting relies on some major principles known as the golden rules of accounting. These Golden rules help in understanding which account will be credited or debited. Depending on the golden rules, individuals must categorize the type of account for each transaction. 

Golden Rules of Accounting based on Accounts Type: 

These rules ensure systematic recording but to apply all three golden rules of accounting, it is important to understand different types of accounts for the classification of financial transactions. 

Types of Accounts 

There are three major types of accounts used under golden rules of accounting. These accounts include Real Account, Personal Account and Nominal Account. While practicing financial accounting, each transaction either debited or credited belongs to one of these accounts. Let’s understand these accounts in detail with their rule & example: 

1. Real Account: Real Account is the general ledger which includes all the transactions related to assets and liabilities. A Real Account does not close when a financial year closes. All the tangible and intangible assets transactions are covered under a real account. Also, note a real account can appear in the balance sheet as well. 

• Rule: Debit what comes in, Credit what goes out
• Example: An individual purchasing a property worth ₹70 lakh on loan. In this case, debit the property account, credit the loan account. 

2. Personal Account: As the name suggests, personal account relates to any individual. It can be a person, associate or a company. Personal accounts are generally further classified as debtors and creditors. 

Debtors are individuals or entities who owe money to the business, they have received goods/services but haven’t paid yet while the creditors are Individuals or entities to whom the business owes money, they have supplied goods/services but are yet to be paid.

• Rule: Debit the receiver, Credit the giver
• Example: Cash Payment made of ₹1 lakh to a client. In this case, debit the client’s account, credit the cash account. 

3. Nominal Account: A Nominal Account includes all the temporary financial transactions of a business including all the expenses, losses, income & gains. These accounts are not like real accounts and are closed at the end of the financial year. 

• Rule: Debit all expenses & losses, credit all income & gains
• Example: In case of salary expenses, debit the salary account & credit the cash account. 

Benefits of Golden Rules of Accounting 

Golden rules of accounting not only helps in maintaining the financial records but also includes other benefits. These advantages of Golden rules of accounting includes: 

1. Maintaining Business Records: Golden Rules helps accounting to maintain the records of any business in proper & systematic order. 
2. Analysis Financial Record: With the help of golden rules, all financial records are maintained properly and thus can be analyzed year to year data. 
3. Budget & Future Business Growth: Proper maintained records helps in understanding the budget investment. Also, it can assist in future business growth ideas. 
4. Works as Evidence: Golden rules help to maintain a clean systematic data for all the types of accounts which can be used for future legal matters as evidence. 
5. Helps in Tax Matters: Proper maintained books of accounts helps in avoiding delays in tax payments resulting in no penalties. Penalties create a huge impact on a business or individual’s reputation as well. 

Conclusion 

Golden rules of accounting are three major rules on which basis accounting works. However, there are three major types of accounts and each account type has its own set of principles. These Golden rules are: 1. For Real Account: Debit what comes in, credit what goes out 2. For Personal Account: Debit the receiver, credit the giver. 3. For Nominal Account: Debit all expenses & losses, credit all income & gains. These golden rules are the backbone of accounting for any business and include benefits such as maintaining business records, analyzing financial record, helps in budget & future growth, works as evidence in legal matters, helps in tax matters, etc.