The Golden Rules of Accounting are the fundamental principles that guide the recording of financial transactions in double-entry bookkeeping. These rules are categorized based on three types of accounts:
1. Personal Account
Rule: Debit the receiver, Credit the giver
- Example: If you pay a supplier (a person or business), the supplier is credited, and cash is debited.
2. Real Account
Rule: Debit what comes in, Credit what goes out
- Example: When you purchase machinery, debit the machinery account (what comes in), and credit cash or bank (what goes out).
3. Nominal Account
Rule: Debit all expenses and losses, Credit all incomes and gains
- Example: When you pay rent, debit rent expense and credit cash.
These rules form the backbone of every accounting transaction and ensure that each entry maintains the accounting equation:
Assets = Liabilities + Equity