How to apply Golden rules with Examples?

After getting through with the types of accounts and the golden rules of accounting, let's understand the concept practically with the help of the following illustration:

Illustration:

Following is the list of transactions recorded by the proprietor Mr. A.

1. Mr. A commenced the business in Cash 1,00,000
2. He buys goods worth rupees 60,000 in Cash
3. He pays a salary of rupees 20,000 to his employees
4. He received interest in his bank account worth rupees 3000.
5. He purchased machinery worth rupees 200000

Solution:

The first step is to identify the accounts involved in the above transactions and classify them accordingly.
This can be clear with the help of the following table:

After classifying the types of accounts involved in the above transactions, the next thing is to record these transactions in Journal by applying the golden rules to each transaction.

This can be explained from the following:

1. Commenced business with Cash ₹1 lakh

Here, the cash account is a real account, and the capital account is by default treated as a liability to business under a Personal Account.

After applying the golden rule for the real account and Personal Account,

Debit what comes in
Credit the giver

The journal entry will be

2. Purchase goods in cash for ₹60,000

Here, the Purchase is a Nominal A/c, and Cash is a Real Account.

After applying the golden rule for a nominal and real account,

Debit all expenses and loss
Credit what goes out

The journal entry will be

3. Pays salary of ₹20,000 to his employees

Here the salary account is a Nominal Account, and Cash is a Real Account.

After applying the golden rule for a nominal and real account,

Debit all expenses and loss
Credit what goes out

The journal entry will be

4.  Received interest from Bank ₹3000

Here, the interest Account is the nominal account under Income, and Bank is a real Account.

After applying the golden rule of Nominal and Real Account,

Credit all Incomes and Gains

Debit what comes in

The journal entry will be

5. Purchased machinery for ₹2,00,000

Here the Machinery A/c is a Real Account, and Bank A/c is also a Real A/c

After applying the golden rule of Real Account

Debit what comes in
Credit what goes out

The journal entry will be

And this is how you treat the transactions of an entity by first, classifying the types of accounts, second identifying its nature, and third passing in the journal entries.