Golden Rules of Accounting

Overview of Account Classification

In the double-entry bookkeeping system, every financial transaction affects at least two accounts. To record these correctly, accounts are categorized into three distinct types, each governed by its own "Golden Rule."

Personal

Real

Nominal

Personal Accounts

Personal accounts represent individuals, firms, companies, or associations. These accounts are used to keep track of the relationship between the business and its creditors or debtors.

Detailed Classifications:

Natural Personal Accounts: Relates to human beings (e.g., Ram's A/c, Sarah's A/c, Capital A/c, Drawings A/c).

Artificial Personal Accounts: Relates to organizations, clubs, or entities that are recognized as "persons" by law (e.g., Microsoft Corp A/c, City Bank A/c, Lions Club A/c).

Representative Personal Accounts: Accounts that represent a group or person indirectly (e.g., Salary Payable A/c, Prepaid Insurance A/c).

The Golden Rule:

Debit the Receiver

Credit the Giver

Example: Cheque issued to Mr. Sandip

By Sandip A/c Dr. 10,000

To Bank A/c Cr. 10,000

Logic: Sandip is the receiver (Debit). Bank is an artificial person giving the funds (Credit).

Example: Ram paid to Shyam

By Shyam A/c Dr. 25,000

To Ram A/c Cr. 25,000

Logic: Shyam is the receiver (Debit). Ram is the giver (Credit).

Real Accounts

Real accounts are related to assets or properties of the business. Unlike nominal accounts, these are permanent accounts and their balances are carried forward to the next financial year.

Detailed Classifications:

Tangible Real Accounts: Assets that have a physical existence and can be touched (e.g., Cash, Machinery, Land, Furniture, Inventory).

Intangible Real Accounts: Assets that have value but no physical form (e.g., Goodwill, Patents, Trademarks, Copyrights).

The Golden Rule:

Debit what comes in

Credit what goes out

Example: Purchase cotton (Inventory)

Cotton A/c Dr. 12,000

To Cash A/c Cr. 12,000

Logic: Cotton (asset) is coming in (Debit). Cash (asset) is going out (Credit).

Example: Sold old Furniture

Cash A/c Dr. 5,000

To Furniture A/c Cr. 5,000

Logic: Cash is coming in (Debit). Furniture is going out (Credit).

Nominal Accounts

Nominal accounts relate to income, expenses, gains, and losses. These are "temporary" accounts that are closed at the end of each accounting period by transferring the balance to the Profit & Loss Account.

Key Categories:

Expenses/Losses: Money spent to generate revenue or value lost (e.g., Salaries, Rent, Electricity, Bad Debts, Loss on sale of asset).

Incomes/Gains: Money earned or profit realized (e.g., Sales revenue, Interest received, Commission received, Profit on sale of asset).

The Golden Rule:

Debit all Expenses and Losses

Credit all Incomes and Gains

Example: Paid Salaries

Salaries A/c Dr. 10,000

To Cash A/c Cr. 10,000

Logic: Salary is an expense (Debit). Cash (Real A/c) is going out (Credit).

Example: Received Commission in Bank

Bank A/c Dr. 15,000

To Commission Rec. A/c Cr. 15,000

Logic: Bank (Personal A/c) is the receiver (Debit). Commission is an income (Credit).