The Golden Rules of Accounting: Mastering Debits and Credits
Cracking the Code of Accounting
Ever wondered why your financial statements don’t balance? Or why your accountant insists on debits and credits? Understanding the golden rules of accounting is the key to making sense of your financial records, ensuring accuracy, and keeping your books in check.
At the heart of these rules is double-entry bookkeeping, where every financial transaction affects at least two accounts:
✅ Debits (what comes in)
✅ Credits (what goes out)
This system keeps your books balanced according to the fundamental accounting equation:
Assets = Liabilities + Equity
Now, let’s break down the three types of accounts and their golden rules, with examples to help you apply them confidently.
1️⃣ The Golden Rule for Real Accounts
🔹 Rule:
➡️ Debit What Comes In
➡️ Credit What Goes Out
What are Real Accounts?
Real accounts deal with assets, liabilities, and equity—things the business owns or owes. These accounts carry forward balances from one accounting period to another.
📌 Example
Auto Enterprises recorded the following transactions for the year ended December 31, 2025:
- 🏭 Purchased a plant for cash: $20,000
- 🚗 Purchased motor vehicles on credit from MV Motors Ltd: $180,000
- 🏦 Issued equity shares for cash: $40,000
Journal Entries
📌 Purchase of plant:
Dr Asset (Plant) $20,000
Cr Cash $20,000
📌 Purchase of motor vehicles:
Dr Inventory (Motor vehicles) $180,000
Cr Payable (MV Motors Ltd) $180,000
📌 Issue of shares for cash:
Dr Cash $40,000
Cr Equity $40,000
✅ Why? When a business receives an asset, we debit it (what comes in). When something leaves the business (cash), we credit it (what goes out).
2️⃣ The Golden Rule for Personal Accounts
🔹 Rule:
➡️ Debit the Receiver
➡️ Credit the Giver
What are Personal Accounts?
Personal accounts involve individuals, companies, or organizations that owe or are owed money. This rule helps track payables and receivables effectively.
📌 Example
Esto Ltd recorded these transactions for March 2025:
- 🛒 Sold goods on credit to Alpha Ltd: $100,000
- 📦 Purchased goods on credit from Same Ltd: $80,000
Journal Entries
📌 Sale of goods on credit:
Dr Receivable (Alpha Ltd) $100,000
Cr Sales $100,000
📌 Purchase of goods on credit:
Dr Inventory (Goods) $80,000
Cr Payable (Same Ltd) $80,000
✅ Why? When someone receives goods on credit, we debit their account. When we owe someone for purchases, we credit them (the giver).
3️⃣ The Golden Rule for Nominal Accounts
🔹 Rule:
➡️ Debit Expenses and Losses
➡️ Credit Income and Gains
What are Nominal Accounts?
Nominal accounts deal with a business’s expenses, losses, incomes, and gains—things that determine profit or loss over time. These accounts reset to zero at the end of the accounting period.
📌 Example
Prester Ltd recorded these transactions for March 2025:
- 🏷️ Sold goods costing $60,000 for $120,000 to Becam Ltd
- 🏠 Sold an asset that cost $30,000 for $40,000 to Pem Ltd
Journal Entries
📌 Sale of goods:
Dr Receivable (Becam Ltd) $120,000
Cr Income (Sales) $120,000
Dr Expenses (Cost of Sales) $60,000
Cr Inventory $60,000
📌 Sale of asset:
Dr Receivable (Pem Ltd) $40,000
Cr Asset $30,000
Cr Profit (Profit or Loss) $10,000
✅ Why? Expenses and losses decrease profit (debit), while incomes and gains increase profit (credit).
📊 Quick Reference Table: The Three Golden Rules
Account Type | Debit | Credit |
Real Accounts | What Comes In | What Goes Out |
Personal Accounts | The Receiver | The Giver |
Nominal Accounts | Expenses & Losses | Income & Gains |
🎯 Conclusion: Apply the Golden Rules with Confidence!
To keep your financial records accurate:
✔️ Categorize transactions correctly into real, personal, or nominal accounts.
✔️ Apply the golden rules consistently to record debits and credits.
✔️ Avoid errors, as misclassifying transactions can lead to inaccurate financial statements.
Need help? Gordon & Associates has expert accountants who can ensure your books are error-free.
📅 Book a free consultation today and let’s simplify your accounting together!
📧 Email us at info@gordonassociates-sl.com
📞 +232 79 677 382
