3 GOLDEN RULES OF ACCOUNTING

As we all know, accounting is the system and process of recording financial transactions pertaining to a business. Subsequently, it is only prudent for every process to have a set of universally accepted and applicable rules. Accountancy provides clarity and coherency in a business that helps businesses make major financial decisions based on expenses, tax liabilities, and cash flow.

The practice of Accounting also follows a certain set of rules, which are also known as the 3 Golden Rules. These Golden Rules were first written by Italian mathematician Fra Luca Pacioli and his close friend Leonardo da Vinci.

What are the Golden Rules?

The 3 Golden of Rules of Accounting dictate thus:-

1. Debit the receiver, credit the giver.
2. Debit what comes in, credit what goes out.
3. Debit all expenses and losses and credit all incomes and gains.

What are the accounts that are governed by the Golden Rules?

There are three types of accounts that exist in the Accounting world.

1. Personal Account: A general ledger account connected to persons (whether natural or artificial) like individuals, firms and associations, or companies is known as a Personal Account.

2. Real Account:- This account is not connected to people or individuals. It is connected to Assets, Liabilities, and Equity. Its mechanics work on a carry forward basis, where the closing balance is retained and carried forward at the end of the year. These carried forward amounts become the opening balances for the next financial year. 

3. Nominal Account:- It is a general ledger account connected to all income, expenses, losses, and gains. All accounting transactions are stored for one fiscal year in this type of account. This allows for resetting the balances to zero and starting afresh. 

What Golden Rule is applicable to a Personal Account?

Personal Account, as mentioned above, is related to persons (natural or artificial) rather than being connected to assets, liabilities, or income and expenses. Under a personal account, when a business receives something from another business or individual, the first business becomes the receiver. The second business or individual from which received it takes the form of the giver.

In this respect, a personal account follows the Golden Rule 1 of Accounting, i.e., Debit the receiver, credit the giver. If we practically apply and implement the said Golden Rule to the system of a Personal Account, the books should reflect a debit on the personal account, and a credit on the business account. 

For example, if we tabulate the said application of Golden Rule 1 on a Personal Account, the transaction will reflect as:-
 

Another example of this could be the system of donation. When someone donates a particular amount of money to an organisation, the organisation is said to have an inflow. Subsequently, the individual must be credited in the records.This is also valid in reverse. As a result of this, the recipient must be debited.