Creating journal entries requires some rules, such rule is named as Three Golden Rules of Accounting standards. There are three kinds of account as Personal Account, Real Account and Nominal Account. Let’s see the rules for those different account from scratch and in detail.
1. Personal Account
Personal account relates to persons with whom a business keeps dealings. A person called be a natural person or a legal person. If a person receives anything from the business, he is called receiver and his account is to debited in the books of the business. If person gives anything to business, he is called as a giver and his account is to be credited in the books of the business.
The Golden Rule for Personal Account is,
Debit the Receiver and Credit the Giver
Example: Goods worth 1000 bucks sold to Mr. Smith from Mr. John. In this transaction, Mr. Smith is the receiver of goods, he is called receiver and his account is to be debited in the books of business. Mr. John is the giver of goods, he is called giver and his account is to be credited in the books of business.
2. Real Account
Real account relates to property which may either come into the business or go from business. If any property or goods comes into the business, account of that property or goods is to be debited in the books of the business. If any property or goods goes out from the business account of that property or goods is to be credited in the books of business.
The Golden Rule for Real Account is,
Debit What Comes in and Credit What Goes out
Example: Goods sold on cash for 1500 bucks. In this transaction cash, an assets for business comes into the business on sales of goods, and therefore cash account is to be debited in the books of business. On the other side, goods, an assets of business goes out of the business on sale and therefore goods account is to be debited in the books of business.
3. Nominal Account
Nominal account is an account that relates to business expenses, loss, income and gains. If business incurs expense to manage and run business, account of that expense is to be debited in the books of business. When a business earns income by rendering services or hiring business assets, an account of that income is to credited in the books of business.
On other hand, if in the case the transaction of sale or purchase of goods or assets, if any loss is incurred by the business, account of that loss is to debited in the books or assets. if in the transaction of sale or purchase of goods or assets any profit is earned by the business, then account of that profit is to be credited in the books of business.
The Golden Rule for Nominal Account is,
Debit all Expenses or Loss and Credit all Income Gains or Profit
Example: (1) Paid 50 bucks as a commission to our agent, here commission which is paid to an agent is business expense and it is to be debited in the books of business. (2) Received 100 bucks as interest on our fixed deposit, here interest which is received is business income and therefore it is to be credited in the books of business.
The above all are the three golden rules of accounting with examples.
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