The 3 Golden Rules of Accounting
At the very heart of all bookkeeping and financial reporting lies the double-entry system. This system’s logic is governed by three fundamental “Golden Rules” that dictate how every business transaction is recorded. Understanding these rules is the key to unlocking the language of business.
Disclaimer: This guide explains foundational accounting principles for educational purposes. It is not a substitute for professional financial or academic instruction. For specific advice, please consult a qualified accountant.
First, Understand the Three Types of Accounts
Before learning the rules, you must know what they apply to. In accounting, every transaction involves at least two accounts, and each account falls into one of three categories:
1. Personal Accounts
These accounts relate to all persons, firms, and institutions. If you can name a person or an organization, it’s a personal account. This includes the owner of the business (Capital Account).
Examples: Customer accounts, Supplier accounts, Capital accounts, Bank accounts.
2. Real Accounts
These accounts relate to all the assets and properties of a business. A simple test: if you can see it, touch it, and it has monetary value, it’s likely a real account. This includes intangible assets too.
Examples: Cash, Buildings, Machinery, Inventory, Copyrights, Goodwill.
3. Nominal Accounts
These accounts relate to all incomes, expenses, gains, and losses. These accounts are temporary and are closed at the end of the accounting year. They represent financial performance.
Examples: Sales Revenue, Rent Expense, Salaries Expense, Interest Income, Loss by Fire.
The Three Golden Rules Explained
Each type of account has one simple rule that governs its debits and credits. **Debit (Dr)** simply means the left side of an accounting entry, and **Credit (Cr)** means the right side. That’s it. These rules tell you which account to place on the left and which to place on the right.
Personal Accounts
Credit the Giver
When a person or entity receives something, their account is debited. When a person or entity gives something, their account is credited.
Example:
You pay $1,000 to your supplier, “Creative Inc.”
➡️ Creative Inc. is the receiver, so their account is Debited.
Real Accounts
Credit What Goes Out
When an asset comes into the business, its account is debited. When an asset goes out of the business, its account is credited.
Example:
You purchase a new laptop for $1,500 cash.
➡️ The Laptop (Asset) comes IN, so it is Debited.
➡️ Cash (Asset) goes OUT, so it is Credited.
Nominal Accounts
Credit All Incomes & Gains
When you incur an expense or a loss, the corresponding account is debited. When you earn income or a gain, the corresponding account is credited.
Example:
You pay $2,000 in monthly salaries.
➡️ Salaries Expense is an expense, so it is Debited.
Summary of the Golden Rules
This simple table brings it all together for a quick reference.
| Account Type | Debit (Dr) Rule | Credit (Cr) Rule |
|---|---|---|
| Personal | The Receiver | The Giver |
| Real | What Comes In | What Goes Out |
| Nominal | All Expenses & Losses | All Incomes & Gains |
