Pass the Journal Entry According to The Three Golden Rules of Accounting, Simplified with Example.
How to pass the journal entry and what the Three Golden Rules of accounting are? Students who know the answers of these two questions, they have learnt the basic of accounting. Here in this article we will read and learn all the basic of accounting terms and definition in a simplified manner with example. We would be able to pass any type of journal entry according to the three golden rules of accounting after completing this article.
Now 'how to pass the journal entry according to the three golden rules', is the final output of this article, first we have to learn some points step by step which are mention below: -
- ACCOUNT AND ITS TYPE:- As per Oxford Dictionary, "A record or statement of financial income, expenditure, receipts, payments, profit, loss, assets and liability relating to a particular period or purpose" and these are divided into three category as follows: -
- Real Account: - It covers transaction related to assets and liabilities. Ex.- Land & Building, Machinery, Accounts Payable, Wages Payable etc. We will find this account in Balance Sheet.
- Personal Account: - As the name suggest, when you will find individuals or other organization in any transaction, remember you get Personal Account. Ex.- Debtors, Creditors, Capital, Drawings etc. We will find this account in Balance Sheet.
- Nominal Account: - Nominal accounts are related to income, expenses, losses, gain. We will find this accounts in Profit & Loss A/c. Ex.- Purchase, Sales, Wages, Commission etc.
- DEBIT:- It represents "What comes in", "The Receiver" and "All Expenses & Losses". It also represents the left hand side of an account.
- CREDIT:- It represents "What goes out", "The Giver" and "All Incomes & Gains". It also represents the right hand side of an account.
Hope you have understood the above points, now we will go the next step i.e. "The Golden Rules of Accounting".
The Golden Rules of Accounting: -
Golden rules are sets of instruction which are made with combining the above points, here it is.
- For Real Account: - "Debit what comes in" & "Credit what goes out"
- For Personal Account: - "Debit the receiver" & "Credit the giver"
- For Nominal Account: - "Debit all expenses and losses" & "Credit all income and gains"
Pass the Journal Entry according to The Three Golden Rules of Accounting: -
We will start to learn the process with the help of some examples so that basic of accounting and application of golden rule can be understand properly.
#Ex.-1. Ram has started his new business with Capital of Rs. 1,00,000/- (Cash). Passed the journal entry.
As there are two sides for each transaction, we have to pass the entry from our end i.e. applied the rules thinking "I have received", "I have paid", "I am the giver", "I am the receiver", "I made profit / loss / expenditure etc." Just think, "I AM THE BUSINESS ORGANISATION OR I AM THE BUSINESS ENTITY".
- Here first of all we have to find two accounts related to the transaction.
- Ram gives Capital of Rs. 1,00,000/-. I get first account i.e. Ram's Capital A/c (Personal A/c)
- Also I get Rs. 1,00,000/- in Cash. i.e. second account "Cash A/c (Real A/c)
- As per rule Real A/c i.e. Cash A/c, which comes to me is debited. (Cash A/c................Dr.)
- As per rule Personal A/c i.e. Ram's Capital, the giver giving me is credited. (Capital A/c.........Cr.)
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