The 3 Golden Rules of Accounting

Every financial transaction your business records affects your books, whether you’re paying suppliers, collecting customer payments, purchasing equipment, or earning revenue. Recording these transactions correctly is essential because even small bookkeeping mistakes can eventually lead to inaccurate financial reports and poor business decisions.

The golden rules of accounting provide a simple framework for deciding which accounts should be debited and credited, making them one of the most important accounting principles every business owner should understand.

While modern accounting software automates much of the bookkeeping process, understanding these accounting rules helps you verify entries, identify mistakes, and better understand how your business’s finances are recorded.

Whether you’re managing your own books or reviewing the work of an accountant, these principles make financial accounting much easier to understand.

In this guide, we’ll explain the three golden rules of accounting, explore personal, real, and nominal accounts, examine practical journal entry examples, and compare the golden rules with the modern rules of accounting.

What are the golden rules of accounting?

The three golden rules of accounting tell you which account gets debited and which one gets credited. These rules will help you record journal and ledger entries, which ultimately help you close the books and review a business’s financial position at the end of an accounting period.

The three golden rules of accounting are:

1. Debit what comes in, credit what goes out
2. Debit the receiver, credit the giver
3. Debit expenses & losses, credit incomes & gains

There are three golden rules since there are three main types of accounts under the traditional classification of accounts. In this section, we will explain how the three golden rules of accounting can help you record entries for the three types of accounts.

1. Personal accounts

Personal accounts are generally used to track transactions with individuals, businesses, and other organizations. Going over personal accounts will help you understand how much you owe to other entities or how much they owe to you, and how much money has been paid to or received from those entities. You should note that loan accounts are treated as personal accounts under this framework.

Let’s go over the golden rule for personal accounts.

Debit the Receiver, Credit the Giver

The golden rule for personal accounts is to debit the receiver and credit the giver. There are two sides to any transaction. As per the golden rule for personal accounts, the receiving side will be debited, and the giver will be credited.

For instance, when a vendor supplies goods to your business on credit, you credit the vendor because the vendor is the giver. Similarly, when you sell goods to a customer on credit, you debit the customer because the customer is the receiver.

2. Real accounts

Real accounts track the assets of the business, including both tangible and intangible assets. Cash, machinery, buildings, land, patents, trademarks, and goodwill are examples of real accounts. The closing balances of these accounts are reflected in the balance sheet. Let’s go over the golden rule for real accounts.

Debit What Comes In, Credit What Goes Out

The golden rule for real accounts is to debit what comes in and credit what goes out. For instance, when you purchase machinery with cash, the machinery account should be debited, and the cash account should be credited.

3. Nominal accounts

Nominal accounts are made for items that exist in name only. Personal accounts are made for entities and individuals, and real accounts are made for assets. Entities like clients, vendors, and business partners are things that actually exist in the real world.

Assets, liabilities, and equity are things that make up a business and will exist as long as the business exists. An asset will exist as long as it isn’t fully depreciated or sold. A liability will exist as long as it is not settled. Equity will exist as long as the shareholder isn’t paid back.

So, from a business’s perspective, personal and real accounts are made for things that actually exist and not just in name only.

Unlike assets or parties to a transaction, income, expenses, gains, and losses relate to financial performance over an accounting period rather than ongoing resources or obligations.

Income from a sale is something that is earned on a particular day or in a particular period. The same can be said for expenses, losses, and gains. Hence, we must make accounts in name only or nominal accounts for income, expenses, gains, and losses.

Let us go over the golden rule for nominal accounts.

Debit Expenses & Losses, Credit Incomes & Gains

The golden rule for nominal accounts is to debit the expenses and losses, and credit the incomes and gains. For instance, if you spent AED 1,000 towards advertising, the advertising expense account should be debited, and the cash account should be credited.

When you sell an asset for a profit, the cash account is debited, and the asset and gain accounts are credited. Similarly, when an asset is sold for a loss, the cash and loss accounts are debited, and the asset account is credited.

The golden rules explain how individual transactions are recorded, but they do not explain how businesses should organize accounts before recording transactions. In our article on the chart of accounts, we explore this first step of bookkeeping.

Why the Golden Rules Matter for UAE Businesses

The golden rules of accounting matter for UAE businesses because following them diligently sets the foundation for financial visibility. In accounting, the accuracy of records depends on two things: whether you debit and credit the right accounts and whether you record the correct values.

The golden rules of accounting take care of the first concern. They provide a framework for recording financial transactions correctly from the start. Correct journal entries lead to correct ledger entries, which lead to correct closing balances being shown in your financial statements. Accurate financial records are necessary for effective business management as well as accurate tax reporting. For UAE businesses, accurate journal entries also support VAT reporting, Corporate Tax return preparation, audit readiness, and proper recordkeeping.

Golden Rules of Accounting with Examples

In this section, we will explore how the golden rules of accounting apply in real business transactions, where the debit and credit sides may not always be the same type of account. Here, we will explore all possible combinations of real, personal, and nominal accounts.

1. Real and nominal

A transaction involving real and nominal accounts would be depreciation, which typically involves an asset account like the machinery account (real), and the depreciation account (nominal).

When you are filing Corporate Tax returns in the UAE, recording transactions accurately is just one piece of the puzzle. The real challenge lies in separating deductible expenses from non-deductible expenses. If this challenge has you stumped, consider checking out our article on non-deductible expenses.

2. Real and personal

Suppose you settle a debt to a creditor. Then, in that transaction, the two accounts will be the cash account (real) and the creditor’s account (personal).

3. Nominal and personal

Suppose your company engages Skrooge’s services for the accounting and tax package. In this transaction, the two accounts will be your accounting and tax-related expenses account (nominal) and the Skrooge account (personal).

4. Real and real

We have already explored what an asset purchase transaction will look like. Now, let’s see what the entry would look like for a machine sold at book value. Here, the accounts involved will be the cash account (real) and the machinery account (real).

Note: this simplified example assumes the machine’s carrying value is AED 200,000 and there is no separate accumulated depreciation balance to clear. In practice, asset disposal entries may also need to remove accumulated depreciation and record any gain or loss.

5. Nominal and nominal

Suppose AED 5,000 was wrongly recorded as travel expense, but it should have been recorded as advertising expense. The correction would involve two nominal accounts:

6. Personal and personal

Any dealings between two or more entities, where neither of which is your company, normally should not affect your business records. But what if your creditors and debtors enter into a transaction to eliminate any indirect dues?

For instance, suppose you bought a car and sold it for a profit to a customer. The customer then directly pays your supplier and simultaneously transfers your share. So, your books need to recognize the transfer between the customer’s account (personal) and the supplier’s account (personal).

The settlement between the supplier and the customer should be recorded as:

Journal entries rarely happen in isolation. If you’d like to see how purchases, sales, reconciliations, and reporting connect in real businesses, explore our Accounting Flows for your industry.

Golden Rules vs the Modern Rules of Accounting

The modern rules of accounting (sometimes referred to as the American approach) divide accounts into six categories, which are assets, expenses, drawings, liabilities, capital, and revenue. Just like the golden rules of accounting, the American rules also tell you which accounts to debit and which ones to credit when recording financial transactions.

The following table summarizes the American rules of accounting.

The American rules can be easier to understand for some people since the treatment for different combinations of accounts is easier to grasp.

Let us explore this with a few examples.

1. Asset purchase

Suppose you buy machinery with cash. In this transaction, the machinery is increasing, and the cash is decreasing. Both are assets. As per the American rules, you must debit the machinery to increase it and credit the cash to decrease it.

2. Depreciation

Eventually, you will have to record depreciation for this new machinery. Depreciation is an expense. So, you should debit depreciation to increase it and credit machinery to decrease it.

3. Additional capital contributions

Purchase of machinery and other such capital expenditures are often funded by additional investments by the existing owners. When an owner contributes additional capital, the business receives more cash. This transaction increases cash as well as capital. So, you must debit cash, which is an asset, and credit capital.

4. Sales

When your goods are sold, the revenue increases, and so does the cash. In such transactions, you must credit the revenue account and debit the cash account.

Conclusion

The golden rules of accounting provide a practical framework for recording business transactions accurately and consistently. By understanding when to debit and credit personal, real, and nominal accounts, you create accurate journal entries that ultimately lead to reliable financial reports.

Although many businesses now rely on accounting software, understanding these accounting principles allows you to review transactions with greater confidence and identify potential bookkeeping errors before they become larger problems.

These accounting rules also make it easier to understand how everyday transactions affect your financial accounting records and your business financial position. Whether you maintain your own books or work with professional accountants, mastering these fundamentals will help you build stronger financial records and make better-informed business decisions.

As your business grows, tracking assets, liabilities, and cash movements becomes increasingly time-consuming. If you have hit that threshold already, consider checking out our Accounting & Tax package.

FAQs