Golden Rule of Accounting

Duality concept provides that every transaction has two sides to it – (1) the debit and (2) the credit. In other words every financial transaction involves the simultaneous receiving and giving the value.

For the purpose of making accounting entries, it is necessary to understand the nature of account. Accounting transactions involves recording of assets, debtors, expenses and capital, creditors and incomes. Incomes and expenses are known as Nominal Accounts, Assets and Capital are known as Real Accounts. In between these two groups, personal accounts like debtors and creditors are also recorded in financial books.

The Golden Rule of accounting provides how the duality aspect of transactions is to be recorded in the books of accounts. These rules are –

Nature of Account	Rule
Nominal Account	Debit all expenses and losses
	Credit all incomes and profits
Real Account	Debit what comes in and
	Credit what goes out
Personal Account	Debit the receiver and
	Credit the giver.

The above rules are explained in the following transactions.

          Illustration 1 :

During the month of January 2001, ABC Ltd. has made the following transactions –

Item No.        Date             Transactions

  1.                       January 1  Issued 10,000 shares of Rs. 10 each in cash

2.	2	Purchased machinery costing Rs. 50,000 from Y Ltd.
3.	3	Purchased raw materials from Z Ltd. worth Rs. 10,000

 4.                                          15   Paid wages in cash Rs. 15,000

 5.                                          17   Sold goods to PQR Ltd. for Rs. 25,000

 6.                                          18   Paid cash to Y Ltd. Rs. 20,000

 7.                                          19   Received from PQR Ltd. Rs. 20,000

Analysis of Transactions

Item No. 1 : ABC Ltd. received cash from its shareholders. Cash is an asset, a real account. Cash is given by shareholders. Cash comes in — Cash A/c is debited and shareholders giving the cash is debited.

Item No. 2 : Machinery is a real account and it comes in, Y Ltd. gives the machinery. Therefore, Machinery A/c is debited and Y’s Ltd. A/c is credited.

Item No. 3 : Purchasing of goods is an expense. It is a nominal A/c and therefore should be debited, Z Ltd. gives the goods, therefore, Z Ltd. A/c should be credited.

Item No. 4 : Wages is an expense, a nominal account, therefore, it should be debited. Cash a real account which goes out and it should be credited.

Item No. 5 : Sale of goods resulted in an income, hence, credited. PQR Ltd. received the goods hence PQR Ltd. A/c should be debited.

Item No. 6 : Y Ltd. is a personal account who receives the cash and thus Y Ltd. is debited; cash a real account which goes out and is therefore credited.

Item No. 7 : Cash comes in. Cash is a real A/c hence debited. PQR Ltd. gives the cash, hence it is credited.

The entries relating to above transactions are given below :

	Item no.		Accounts involved	Nature of A/c	Dr.(Rs.)	Cr.(Rs.)
	1.		Cash	Real	1,00,000
			Shareholders	Personal A/c		1,00.000
	2.		Machinery	Real	50,000
			Y Ltd.	Personal		50,000
	3.		Purchases	Nominal	10,000
			Z Ltd.	Personal		10,000
	4.		Wages	Nominal	15,000
			Cash	Real		15,000
	5.		PQR Ltd.	Personal	25,000
			Sales	Nominal		25,000
	6.		Y Ltd.	Personal	20,000
			Cash	Real		20,000
	7.		Cash	Real	20,000
			PQR Ltd.	Personal		20,000