Golden Rules Of Accounting

To understand the Golden Rules of Accounting we must first understand the types of accounts.

THERE ARE THREE TYPES OF ACCOUNT

            1.  > REAL ACCOUNT

             2. > PERSONAL ACCOUNT

             3. > NOMINAL ACCOUNT




Modern Rules of Accounting

                              1. Capital
                              2. Assets
                              3. Liabilities
                              4. Income
                              5. Expenses


We will see the following example to understand application of these rules. Consider the following  transactions:


1. Mr. Shivram and Mrs. Kirti who are husband and wife started offering consultancy services, by investing cash of  Rs. 5,00,000 and  Rs. 2,50,000 respectively.

From business point of view the two effects of this transaction are: first, the cash of ` 7,50,000 has
come into business and second, there is an obligation of the business towards Mr. Shivram and Mrs. Kirti.

 Now, we know that Cash is real account, so rule for real account will apply. Cash has come into
the business thereby increasing the asset. Hence, Cash Account should be debited.

 We also know that Shivram’s A/c and Kirti’s A/c are personal accounts, so rule for personal
account will apply. (As both Shivram and Kirti are givers of cash, their respective accounts will
be credited.)
Entry - 

Debit - Cash a/c                                  7,50,000                           
Credit - Shivram’s Capital a/c       5,00,000           
Credit - Kirti’s capital a/c              2,50,000              

Please note that the total debits and total credit match. It is the reflection of the dual aspect
concept


2.  They buy office furniture of Rs. 25,000 for cash.

 Here, the two effects are: First, Furniture (which is an asset) has come into the business and second
cash (which is also an asset) that has gone out of business.
Since, both the accounts viz. Furniture and Cash are real accounts, rule for real account will apply.
Furniture has come in (asset increase), it will be debited and cash has gone out (asset decrease),
it will be credited.

Entry - 
Debit - Furniture  A/c                 25,000
    Credit - Cash A/c                      25,000

3.  They open a current account with HDFC Bank by depositing Rs.1,00,000
Here, the two effects are: First, cash in hand has gone out (asset decrease) and second, the business  cash at bank has increased (asset increase). Cash is a real account and Bank is a personal account.

Entry -      
Debit - HDFC Bank A/c         100000
Credit - Cash A/c                      100000 

4. They pay office rent of Rs.15,000 for the month by cheque drawn on their HDFC Bank to M/s Realtors Properties.
Here, the two effects are: First, since the payment is made by cheque, bank balance will reduce
(asset decrease), and second, rent being an item of expense rent expense will increase.

HDFC Bank A/c being a personal A/c, rule for personal account will apply. HDFC bank A/c will be
credited.
Rent A/c being a nominal account, rule for nominal account will apply. Since, rent is paid, it is an
expense. Hence, Rent A/c will be debited.

Entry -      
Debit - Rent A/c                               15000                     
Credit - HDFC Bank A/c                15000

In case of a cash transaction, the party with whom the transaction is made, is not recorded, but
the cash or bank account is recorded.

5 . They buy a motor car worth ` 4,50,000 from Millennium Motors by making a down payment of Rs. 50,000 by cheque drawn on HDFC Bank and the balance by taking a loan from ICICI Bank.

Here the effects will be: First, Motor Car (which is an asset) has come into the business (increase in asset). Second, Bank balance (which is an asset) has reduced (decrease in asset). Thirdly, there is an obligation created towards ICICI Bank from whom loan of Rs.400000 is taken (increase in liability).
HDFC Bank is a personal account, so rule for personal account will apply. HDFC Bank will be credited.
Motor Car is a real account is so rule for real account will apply. Motor Car has come in, so Motor Car A/c will be debited.
ICICI Bank is provider of loan to whom money is payable by the business in future. ICICI Bank account being a personal account, rule for personal account will apply. ICICI Bank being the giver,       it will be credited. (Note: In different opinions, we can consider HDFC Bank A/c as Real Account. The
reason behind that is the balance at HDFC Bank A/c belongs to the business, so it is an asset. However,  in any circumstances ICICI Bank, who has paid Millennium Motors on behalf of the business, cannot be considered as Real Account. It is a Personal Account as it does not hold any business cash)

Entry -    
Debit - Moter Car A/c                   4,50,000
Credit - HDFC Bank A/c                50,000
Credit - ICICI Loan A/c                 4,00,000