Ghouls 'N Ghosts takes place three years after Arthur defeated the Demon King Astaroth and rescued Princess Prin-Prin. The new villain, Great Demon King Lucifer, has taken over Ghoul Realm and is terrorizing the kingdom. When Arthur returns from a journey, he finds his beloved Princess' castle and village under attack by Lucifer's forces. The Princess is struck by a laser beam, leaving her soul trapped inside.
Arthur must now venture into Lucifer's palace to rescue the Princess' soul and defeat the demon king. Unlike in the first game, the new levels take place in different locations such as a tower, a mass of skeletons, and a castle. Players control Arthur as he progresses from left to right (from bottom to top in level 3), hacking down monsters with his sword.
The gameplay has been tweaked since the first installment, allowing Arthur to fire vertically and collect new weapons from fallen enemies. The landscape is filled with treasure chests that can be opened by timing a jump or using projectiles, resulting in either new equipment, golden armor, or hostile wizards that turn Arthur into an old man or duck.
The golden armor gives Arthur a chargeable "super" attack that varies depending on the possessed weapon. These attacks include a lightning bolt and a spell that creates a mirror-like clone of Arthur, effectively doubling his attack power. The game features five stages with their own settings and final bosses, offering a challenging experience for players.