Golden Rules of Accounting

To understand the Golden Rules of Accounting we must first understand the types of accounts. The account classification applies to all the types of general ledgers. In other words, every account will fall in one of the broad classifications given below.

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. An example of a Real Account is a cash Account.

A Personal account is a General ledger account connected to all persons like individuals, firms and associations. An example of a Personal Account is a Ram’s Account.

A Nominal account is a General ledger account pertaining to all income, expenses, losses and gains. An example of a Nominal Account is an discount account.

Golden rules of accounting

As per the accounts type, the accounting rules have been defined. For each account there is a set of Golden Rules and hence there are three Golden Rules of Accounting. The Golden rules define the treatment of all transactions conducted by the business.

Illustration An entity named Orange Ltd. has the following transactions.

1. Purchase goods worth Rs.50,000 from Shyam Ltd.
2. It deposits Rs.10,000 into Bank.
3. It sells goods worth Rs.35,000 to Ram.
4. It pays Rs.12,000 as salary.
5. It earns Rs.3,000 as interest on a bank account.

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