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The Three Golden Rules of Accounting are a set of principles that guide how debits and credits should be handled in the general ledger for personal, real, and nominal accounts. They are part of the Generally Accepted Accounting Principles (GAAP) and emphasize the importance of recording and classifying transactions properly. The other two GAAP principles are that every transaction needs to be recorded and double entry is the preferred method of recording transactions.
There are three golden rules of accounting. Each one applies to a different type of account: nominal, personal, and real. The rules describe how debits and credits should be handled in the general ledger for each type of transaction. As a group, they are one of the three generally accepted accounting principles (GAAP) that make up the code of conduct of the American Institute of Certified Public Accountants.
The first golden rule of accounting concerns the management of personal accounts. This group includes not only individuals, but also companies and other organizations. The rule for this group is that the giver should be credited and the recipient should be debited.
Real accounts are covered by the second of the golden rules of accounting. This type of account refers to assets. They can be tangible assets like equipment or furniture or intangible assets like copyrights and patents. The rule for this type of account is to credit what comes out of the account and debit what comes in.
Nominal accounts are covered by the third golden rule of accounting. These accounts cover temporary income and expenses such as sales and purchases. The rule for this type of account is to credit gains, income or debit losses or expenses.
As part of the third of the Generally Accepted Accounting Principles, the Three Golden Rules of Accounting help clarify the details of how to manage general ledger entries for transactions. The rules emphasize the importance of not only recording all transactions, but classifying them properly. By entering information in the right place and way, accounts will be accurate and easier to understand in the future. The records will also be more useful tools for research and long-term evaluations.
The other two generally accepted accounting principles are, first, that every transaction needs to be recorded, and second, that double entry is the preferred method of recording transactions. Rule number one emphasizes that it is not acceptable to skip entering a transaction, whether intentionally or not. The second rule establishes the importance of entering information for both sides of a transaction: what is lost and what is won.
In general, the three general rules of accounting and GAAP provide clarity and guidance on how to handle the two most important concepts in accounting: debits and credits. A credit is any type of asset, while a debit is anything that is removed from the asset column. For example, when an individual purchases a pencil, that purchase increases the value of the property items in the assets column while also removing monetary assets from the account. The three golden rules of accounting are essentially a further articulation of that general concept.
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