Accounting principles gives insight into money, spending and saving in business. It is the language of business. In accounting, one of the important basics is the golden principles of accounting. These principles relay how we need to record various types of monetary transactions. In more straightforward terms, they respond to the question: how do we take proper accounts?
So, what are the golden principles of accounting? There are three golden rules that guides us to right recording of transactions. These principles are also referred to as the 3 golden rules of accounting principles or the three golden principles of accounting. These rules are always true. They work for any business. These rules are used by shop owners, business owners, and accountants to maintain clean and accurate records.
What are the Golden Rules of Accounting?
These are the golden principles of accounting you should be aware of if you are an accounting student or a beginner in the field. These rules guide us regarding how to treat each and every transaction in the book of accounts.
Golden Principles of Accounting is based on Dual Entry. This implies every transaction contains two components — one is debit, and the other is credit. So, for every rupee received there is a rupee spent or given.
These rules make sure that:
- The accounting stays balanced
- The narratives are accurate and impartial
- We can trace everything we put in there back to its source
In any transaction at least 2 accounts are affected. Therefore, these principles facilitate us in determining what account we need to debit and what account we should credit. By following these rules properly, we can never go wrong in our financial records.
They help with the preparation of financial statements like balance sheet, profit & loss account and cash flow statement. For without such rules everything can become confused and entries can sour and spoil the books.
Types of Accounts in Accounting
Note that, you first need to know the 3 types of accounts before we get into the 3 golden principles of accounting. You post all of the accounting transactions to those accounts.
It offers three types of accounts:
Personal Account
More so this business account like people or persons or companies. It may be the actual person (Raj or Sita), or a fictitious person (Tata Ltd or SBI).
Examples:
- Ram’s Account
- Axis Bank Account
- Infosys Ltd Account
Real Account
This account includes assets. These valuable items can be anything of tangible nature (such as money or a sofa) or intangible characteristics that have value (such as goodwill).
Examples:
- Cash Account
- Building Account
- Land Account
Nominal Account
This has expenses, losses, income and profits. They roll over every New Year’s Day. They have been performing over a period of time.
Examples:
- Salary Account
- Rent Account
- Commission Received Account
Once you know these 3 types, you can easily apply the 3 golden rules of accounting principles. These rules are conditional on the specific type of account involved in a transaction.
3 Golden Rules of Accounting
The three golden rules of accounting are easy to understand once you identify the type of account. These rules specify what account to debit and what account to credit.
Personal Account Rule
Record a debit in the Receiving account and a credit in the Giving account
If this transaction is to a person, or one-business entity.
Example:
You pay ₹10,000 to Ram. Here, Ram is the receiver.
- Debit: Ram’s Account
- Credit: Cash Account
Real Account Rule
Debit Anything That Comes In, And Credit Anything That Leaves
This applies to physical or non-physical assets.
Example:
You purchase a furniture of ₹20,000 in cash.
- Credit: General Ledger Account (what goes out)
- Debit: Cash Account (Cash is going out) Credit: Cash Account
Nominal Account Rule
Debit All Expenses and Losses Credit All Incomes and Gains
This rule holds for daily expenses or income.
Example:
You pay rent of ₹5,000.
- Debit: Rent Account (expense)
- Credit: Cash Account
It should be noted that these rules can be easily remembered if you first identify which type of account you are dealing with. Finally, use the matching golden rule.
Golden Principles of Accounting with Examples
Now, let us see how the golden rules of accounting applies with examples. So we will take some realistic examples that how one can pass the entries based on 3 golden rules of accounting principles.
Example 1: Incorporated with ₹1,00,000 Cash
- Cash Account – Real Account (What comes in = Debit)
- Capital Account – Personal Account (Giver = Credit)
Journal Entry:
Cash A/c Dr. ₹1,00,000
To Capital A/c ₹1,00,000
Example 2: Buy on Credit Purchase of ₹80,000 From Ramesh
- Purchase Account – Nominal Account (Expense = Debit)
- Person Account Giver = Credit Ramesh Account
Journal Entry:
Purchase A/c Dr. ₹80,000
To Ramesh A/c ₹80,000
Example 3: Cash Sale of Goods for ₹10,000
- Cash Account – Real Account (All the Cash movement coming in = Debit)
- Nominal accounts that reflect credit sales (Income = credit) – Sales account
Journal Entry:
Cash A/c Dr. ₹10,000
To Sales A/c ₹10,000
Example 4: Paid Salary ₹8,000
- It is a Salary Account (Nominal Account – Expense = Debit)
- Cash Account – Actual Account (Outcomes = Credit)
Journal Entry:
Salary A/c Dr. ₹8,000
To Cash A/c ₹8,000
These examples are easy for understanding the golden rules of accounting principles. You always start by finding out what kind of account. Then use the right golden rule.
Importance of Golden Principles of Accounting
All they do is mug up the golden rules of accounting. They can help real businesses. Creating these rules supports simple and transparent financial data.
Here’s why they matter:
- They minimize entry errors.
- They keep company records up to date.
- They form a solid foundation for creating ledgers and statements.
- These assist in making decisions for finance.
- They assist companies with complying with laws and audits.
These rules are used daily by small businesses, shops, and big companies in India. Even Tally, Quick Books etc are rooted in these rules at the core. If you know these rules, you can work with any accounting system.
Relevance to ACCA Syllabus
ACCA makes it significant about understanding the double entry system for the FA (Financial Accounting) and MA (Management Accounting) papers. Golden rules of accounting are the fundamentals of journal entries, ledgers and final accounts. Understanding these rules contributes to success in many ACCA modules.
Golden Principles of Accounting ACCA Questions
Q1. What account types have the rule “Debit the Receiver, Credit the Giver”?
A. Nominal
B. Real
C. Personal
D. Liability
Answer: C Personal
Q2. Which of the golden rules will work for a business that has paid rent?
A. That method is based on the idea that you debit what comes in and credit what goes out
B. Debiting the receiver and crediting the giver
C. Expenses credited, all Income debited
D. All expenses and losses are to be debited and all incomes and gains are to be credited
Answer: D Debit all expenses and losses, credit all incomes and gains
Q3. When ₹15,000 is paid to a creditor, which account is credited?
A. Credit Cash, Debit Sales
B. Debit Cash and Credit Creditor
C. Debit Creditor, Credit Cash
D. Debit Expenses, Credit Cash
Ans: C Debit Creditor, Credit Cash
Q4. Which of the following is nominal account?
A. Furniture
B. Capital
C. Salary
D. Debtors
Answer: C Salary
Q5. What rule do we use when we buy equipment in cash?
A. Debit the receiver; credit the giver
B. Debit any receipt, credit any payment
C. Debit expenses; credit income
D. Debit the buyer; credit the seller
Ans: A Debit what comes in, credit what goes out
Relevance to US CMA Syllabus
CMA Part 1 Events required the foundation of accounting principles such as the double-entry rules and the journal entries. Three golden principles of accounting provide an insight and knowledge to CMA candidates regarding internal control, cost records and financial data preparation.
Golden Principles of Accounting US CMA Questions
Q1. Which of the following adheres to the rule “Debit what comes in, credit what goes out”?
A. Nominal Account
B. Real Account
C. Capital Account
D. Personal Account
Answer: B Real Account
Q2. When a business receives interest, which entry is correct?
A. Debit Interest Received, Credit Cash
B. Debit Cash, Credit Interest Revenue
C. Debit Expenses, Credit Cash
D. Debit Debtor, Credit Bank
Answer: B Debit Cash, Credit Interest Received
Q3. ₹5,000 is receivable by a company as cash advance rent. What is the proper treatment?
A. Debit Rent, Credit Cash
B. Debit Real Estate Advance Rent, Credit Cash
C. Debit Cash, Credit Rent Received in Advance
D. Debit Income; Credit Advance Rent
Ans: C Accounting (Rent Received in Advance)
Q4. What does an actual account mean?
A. Income and expense
B. Personal and liability
C. Physical and non-physical assets
D. Equity and capital
Ans: C (both physical and non-physical resources).
Q5. → The entry in the books for salary of ₹2,000 paid by bank will be:
A. Debit Bank, Credit Salary
B. Debit Salary, Credit Bank
C. Debit Salary, Credit Cash
D. Debit Wages, Credit Salary
Ans: B Debit Salary Credit Bank
Relevance to US CPA Syllabus
The FAR (Financial Accounting and Reporting) exam questions check your grasp of elementary accounting mechanics — account classes in addition to journal entries. The 10 golden rules of accounting principles lay down the groundwork for the financial reporting and auditing tasks performed in the CPA examination.
Golden Principles of Accounting US CPA Questions
Q1. Where does it merit among the above “Debit all expenses and losses, Credit all incomes and gains”?
A. Real Account
B. Personal Account
C. Nominal Account
D. Cash Account
Answer: C Nominal Account
Q2. Which entry represents receiving ₹12,000 in cash from a customer?
A. Debit Sales, Credit Cash
B. Debit Customer, Credit Sales
C. Debit Cash, Credit Customer
D. Debit Revenue, Credit Cash
Ans: C Cash Dr. Customer Cr.
Q3. What is a “Goodwill” account?
A. Real Account
B. Personal Account
C. Nominal Account
D. Liability Account
Answer: A Real Account
Q4. When selling goods on credit, the following journal entry will be made.
A. Debit Cash, Credit Sales
B. Debit Debtor, Credit Sales
C. Debit Sales, Credit Cash
D. Debit Sales, Credit Debtor
Ans: B Debit Debtor Credit Sales
Q5. Which is a personal account?
A. Commission Account
B. Salary Account
C. Capital Account
D. Furniture Account
Answer: C Capital Account
Relevance to CFA Syllabus
There is also a big emphasis on how to construct financial statements in CFA Level 1 Financial Reporting and Analysis. Learning golden accounting principles helps decode income statements, asset and funding class definitions, and even basic types of journals.
Golden Principles of Accounting CFA Questions
Q1. One can think of it as a golden rule to be followed by a Real Account.
A. Debit expenses, credit income
B. Debit what comes in; credit what goes out
C. Debit one party, credit another party
D. Liabilities debit, assets credit
Answer: B Debit in, credit out
Q2. The journal entry of cash purchase of inventory is
A. Debit Purchases; Credit Cash
B. Debit Cash Credit Inventory
C. Debit Inventory [Asset], Credit Cash [Asset]
D. Dr. Inventory Cr. Supplier
Ans: C Debit Inventory, Credit Accounts Payable
Q3. Does it bypass income when it is earned but not received?
A. Debit Income A/c, Credit Cash
B. Debit Cash; Credit Accrued Income
C. Debit Accrued Income and Credit Income A/c
D. Debit Bank, Credit Debtor
Ans: D. Debit Bank, Credit Debtor
Q4. Which of the following is the nominal account?
A. Equipment
B. Rent Expense
C. Bank
D. Debtor
Answer: B Rent Expense
Q5. Or in the case of receiving a loan how does the golden rule apply?
A. Debit Loan A/c, Credit Bank A/c
B. Bank A/c Debit, Loan A/c Credit
C. Debit Capital, Credit Bank
D. Debit Income, Credit Liability
Answer: B Debit Bank A/c, Credit Loan A/c
