Golden Rule of Accounts

Every economic entity must present its financial information to all its stakeholders. For this presentation, it must account for all its transactions. Since economic entities are compared to understand their financial statuses, there has to be uniformity in accounting. To bring about uniformity and to account for the transactions correctly there are three Golden Rules of Accounting.

1. GOLDEN RULE OF ACCOUNTS

2. Golden Rules– Overview Every economic entity must present its financial information to all its stakeholders. For this presentation, it must account for all its transactions. Since economic entities are compared to understand their financial statuses, there has to be uniformity in accounting. To bring about uniformity and to account for the transactions correctly there are three Golden Rules of Accounting.

3. 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 A Real Account is a general 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. A Personal account is a General ledger account connected to all persons like individuals, firms and associations. A Nominal account is a General ledger account pertaining to all income, expenses, losses and gains.

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

5. ILLUSTRATION An entity named Orange Ltd. has the following transactions. It deposits Rs.10,000 into Bank It buys goods worth Rs.50,000 from Apple Ltd. It sells goods worth Rs.35,000 to Melon Ltd. It pays Rs.12,000 as Rent for its premises It earns Rs.3,000 as interest on bank account.

6. ILLUSTRATION Transaction Accounts involved Type of Accounts Deposit Rs.10,000 in Bank Bank Account Cash Account Real Account Real Account Purchase goods worth Rs.50,000 from Apple Ltd. Purchase Account Apple Ltd. Account Nominal Account Personal Account Sale of goods worth Rs. 35,000 to Melon Ltd. Sales Account Melon Ltd. Account Nominal Account Personal Account Pays Rs.12,000 as rent Rent Account Bank Account Nominal Account Real Account Earn Rs.3,000 as interest on Bank account Interest received Bank Account Nominal Account Real Account

7. ILLUSTRATION-APPLYING GOLDEN RULES Deposit Rs.10,000 in Bank Bank A/C Dr. 10,000     To Cash A/ C 10,000 Purchase goods worth Rs.50,000 from Apple Ltd. Purchase A/C Dr    50,000     To Apple Ltd. A/C 50,000 Sale of goods worth Rs.35,000 to Melon Ltd. Melon Ltd. A/C Dr 35,000     To Sales A/C 35,000 Pays Rs.12,000 as rent

8. ILLUSTRATION-APPLYING GOLDEN RULES Pays Rs.12,000 as rent Rent A/C Dr. 12000     To Bank A/C 12000 Earn Rs.3,000 as interest on Bank Account Bank A/C Dr 3,000     To Interest Received A/C 3,000

9. CONCLUSION All transactions of an entity must be accounted for. To account these transactions the entity must pass journal entries which will then summarize into ledgers. The journal entries are passed on basis of Golden Rules of accounting. To apply these rules one must first ascertain the type of account and then apply these rules. Debit what comes in, Credit what goes out Debit the receiver, Credit the giver Debit all expenses Credit all income These are the foundation of accounting and hence are called the Golden Rules of accounting. They are like the letters of the English alphabet if one does know letters he cannot know words and hence cannot use the language. Similarly for accounting, if one does not know the golden rules, he cannot pass journal entries and hence won’t be able to know to account.

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