The Double Entry System — Three Golden Rules

Prerequisites: Module 2 — Accounting Entry Systems

Learning Objectives

By the end of this module, you will be able to:

• State and apply all Three Golden Rules of accounting
• Classify any account and determine whether to debit or credit it
• Record complete journal entries for real business transactions
• Compare the Traditional (Golden Rules) approach with the Modern approach

The Three Golden Rules

Every journal entry in accounting is guided by three simple rules — one for each type of account. Memorise these. You will use them thousands of times in your accounting career.

┌─────────────────────────────────────────────────────────────────┐
│  ACCOUNT TYPE      GOLDEN RULE                                   │
├─────────────────────────────────────────────────────────────────┤
│  Real Account      Debit what COMES IN / Credit what GOES OUT   │
│  Personal Account  Debit the RECEIVER  / Credit the GIVER       │
│  Nominal Account   Debit EXPENSES+LOSSES / Credit INCOME+GAINS  │
└─────────────────────────────────────────────────────────────────┘

Rule 1 — Real Accounts

Debit what comes in. Credit what goes out.

Real accounts are for tangible assets — things you can touch. Cash, stock, furniture, machinery, land. When an asset comes into the business, debit it. When it goes out, credit it.

• Buying stock? Stock comes in → Debit Stock
• Selling stock (goods go out)? Stock goes out → Credit Stock (or Credit Sales)
• Receiving cash? Cash comes in → Debit Cash
• Paying cash? Cash goes out → Credit Cash

Rule 2 — Personal Accounts

Debit the receiver. Credit the giver.

Personal accounts are for persons and organisations. When someone receives something from your business, debit them. When someone gives something to your business, credit them.

• Customer receives goods from you → Debit Customer (he is now your debtor)
• Supplier gives you goods on credit → Credit Supplier (you now owe them)
• Bank gives you a loan → Credit Bank Loan A/c
• You repay a creditor → Debit Creditor (clearing their balance)

Rule 3 — Nominal Accounts

Debit all expenses and losses. Credit all income and gains.

Nominal accounts cover the P&L items — incomes and expenses. Expenses always go on the debit side. Income always goes on the credit side.

• Paying rent → Debit Rent A/c
• Paying salaries → Debit Salary A/c
• Goods sold (income earned) → Credit Sales A/c
• Interest received → Credit Interest Received A/c

The Modern Approach (Accounting Equation Method)

The modern approach uses the accounting equation directly. Instead of memorising account types, you ask: does this increase or decrease an asset/liability/income/expense/capital?

Both approaches — Traditional and Modern — give the same answer. The Golden Rules are more commonly used in Indian accounting practice, so we will use them throughout this course. But keep the Modern approach in mind; it is more intuitive for complex transactions.

Sunrise Retail — Case Study Application

Sunrise Retail Pvt Ltd — Complete April 2025 Journal

Let's apply the Three Golden Rules to every transaction Sunrise Retail recorded in April 2025. For each, we identify:

1. Accounts affected
2. Type of account (Real / Personal / Nominal)
3. Rule applied
4. Dr / Cr decision

Transaction 1 — April 5: Purchase from TechWorld (Credit)

100 phones purchased from TechWorld Distributors, Mumbai @ ₹12,000 each on credit. IGST @ 18%.

• Purchases: ₹12,00,000
• IGST Input: ₹2,16,000
• Total payable to TechWorld: ₹14,16,000

Transaction 2 — April 8: Rent Paid by Cheque

Rent ₹30,000 + CGST 9% + SGST 9% = ₹30,000 + ₹2,700 + ₹2,700 = ₹35,400 paid by cheque.

Transaction 3 — April 10: Sale to Digital Hub (Credit, Intrastate)

30 phones sold to Digital Hub Retail, Secunderabad @ ₹16,000 each. CGST + SGST @ 9% each.

• Sales: 30 × ₹16,000 = ₹4,80,000
• CGST Output: ₹43,200 | SGST Output: ₹43,200
• Total invoice: ₹5,66,400

Transaction 4 — April 12: Sale to CloudStore (Credit, Interstate)

20 phones sold to CloudStore Online Pvt Ltd, Bangalore @ ₹16,500 each. IGST @ 18%.

• Sales: 20 × ₹16,500 = ₹3,30,000
• IGST Output: ₹59,400
• Total invoice: ₹3,89,400

Transaction 5 — April 15: Electricity Bill Paid

Electricity ₹8,500 paid in cash (no GST).

Transaction 6 — April 18: Payment Received from Digital Hub

₹5,66,400 received from Digital Hub via NEFT.

Transaction 7 — April 20: Part Payment to TechWorld

₹5,00,000 paid to TechWorld against outstanding amount via NEFT.

Transaction 8 — April 25: Salaries Paid

Total salaries ₹1,50,000 paid via bank transfer.

Transaction 9 — April 30: Depreciation

Furniture ₹1,50,000 @ 10% p.a. WDV = ₹15,000/year = ₹1,250/month. Computer ₹80,000 @ 40% p.a. WDV = ₹32,000/year = ₹2,667/month.

Complete April 2025 Journal — Summary Table

Total Debits = Total Credits = ₹30,35,217 ✓

Step-by-Step Decision Framework

Struggling to decide which account to debit and which to credit? Follow this 3-step process for every transaction:

STEP 1 — Identify the accounts involved
          ↓
          What is being given? What is being received?
          Name ALL accounts affected.

STEP 2 — Classify each account (Real / Personal / Nominal)
          ↓
          Real?    → Tangible asset (cash, stock, machinery)
          Personal? → Person, company, bank, representative
          Nominal?  → Expense, income, gain, or loss

STEP 3 — Apply the Golden Rule for each account
          ↓
          Real:     Comes in → DR   |   Goes out → CR
          Personal: Receiver → DR  |   Giver → CR
          Nominal:  Expense/Loss→DR |   Income/Gain → CR

Worked Breakdown: April 10 — Sale to Digital Hub

Transaction: Sold 30 mobile phones to Digital Hub Retail (Hyderabad) on credit at ₹16,000 each + CGST 9% + SGST 9%.

Amounts:

• Sale value: 30 × ₹16,000 = ₹4,80,000
• CGST @ 9%: ₹43,200
• SGST @ 9%: ₹43,200
• Receivable from Digital Hub: ₹5,66,400

Modern Approach Comparison

The same entry using the Modern Approach (Assets = Liabilities + Capital):

Both approaches give identical Dr/Cr results. Pick one and be consistent. Most professionals use Golden Rules for day-to-day entries and the Modern Approach for conceptual understanding.

Practice Exercise

Exercise 1: On May 3, 2025, Sunrise Retail purchases 50 Samsung phones from Sparsh Tech Solutions, Hyderabad (intrastate) at ₹11,500 each, paying 50% by cheque immediately. GST: CGST 9% + SGST 9%.

Calculate all amounts and write the journal entry.

Exercise 2: Write journal entries for these two May 2025 transactions:

• May 5: Kiran Sharma (MD) takes 2 phones from stock for personal use (cost ₹12,000 each)
• May 7: Sunrise Retail receives ₹3,89,400 from CloudStore for the April 12 invoice

Key Terms

Next: Module 4 — Accounting Principles — The 12 GAAP principles that govern how every transaction is recorded and reported, illustrated with Sunrise Retail examples for each.