Debit and Credit

What are the three golden rules of account?


Q. What are the three golden rules of account?

A. The three golden rules of accounting are: Real Accounts, Nominal Accounts, and Personal Accounts. These rules help maintain the fundamental principles of double-entry accounting, ensuring that every transaction is accurately recorded and balanced.

Debit and Credit: Rules of Account

In the context of stock market investment, you would primarily deal with "Real Accounts" and "Nominal Accounts." while real accounts are essential for tracking the value of your investments in the stock market, nominal accounts are crucial for recording expenses, gains, and losses associated with your investment activities.

Real Accounts:

"Debit what comes in, credit what goes out"

Real accounts are accounts related to assets, liabilities, and owner's equity. In the context of stock market investment, real accounts are significant because they involve tangible assets like stocks, bonds, cash, etc. Real accounts track the actual financial position of an investor by recording the value of their investments, such as the stocks they hold in various companies, bonds, or other financial instruments.

In-short: This rule applies to transactions involving tangible assets like cash, machinery, inventory, etc. When an asset increases, it is debited, and when it decreases, it is credited.

Transaction Debit (Dr) Entry Credit (Cr) Entry
Cash sales Cash Sales revenue
Loan received Cash or Bank Loan liability
Investment purchase Investment asset Cash or Bank

Nominal Accounts:

"Debit all expenses and losses, credit all incomes and gains"

Nominal accounts are accounts related to revenues, expenses, gains, and losses. When you invest in the stock market, you may incur expenses such as brokerage fees, commissions, taxes on gains, etc. These expenses are recorded in nominal accounts. Similarly, gains or losses from selling stocks or receiving dividends are also recorded in nominal accounts.

In-short: This rule applies to transactions related to expenses, revenues, gains, and losses. Expenses and losses increase with a debit and decrease with a credit, while incomes and gains increase with a credit and decrease with a debit.

Transaction Debit (Dr) Entry Credit (Cr) Entry
Payment of rent Rent expense Cash or Bank
Sale of goods Cost of goods sold Sales revenue
Loss on sale of asset Loss on sale Asset being sold

Personal Accounts:

"Debit the receiver, credit the giver"

Personal accounts typically deal with individuals, creditors, debtors, etc., and are not directly related to stock market investment unless you are managing investments on behalf of someone else or investing through a corporate entity.

In-short: When receiving something, the receiver's account is debited, and when giving something, the giver's account is credited.

Transaction Debit (Dr) Entry Credit (Cr) Entry
Purchase of inventory Inventory asset Accounts payable
Payment to supplier Accounts payable Cash or Bank
Loan repayment Loan liability Cash or Bank

Note: These rules form the foundation of double-entry bookkeeping, ensuring that each transaction has equal debits and credits, thereby maintaining the balance in the accounting system.

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