Master the Golden Rules of Accounting: A Guide to Personal, Real, and Nominal Accounts

What is Accounting?

Accounting is an information system that provides quantitative, financial information to stakeholders about the economic activities and condition of a business so that they can make business or economic decisions.

Whereas Bookkeeping is “Only involves activities of collecting and recording financial data”.

Definition of Accounting

1. The process of identifying, measuring, recording and communicating economic information to permit informed judgment and decisions by users of the information.
2. Accounting – AICPA - “Accounting is the of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are of a financial character and interpreting the result thereof” 

Process of Accounting

1. Identify: Identify those events that are considered as evidence of economic activity relevant to the business
2. Measuring: Measuring the events
3. Recording: Keeping of a chronological diary of measured events in an orderly and systematic manner.
4. Communicating: Communicate through the preparation and of accounting reports to the interested parties.

What are the Golden rules of accounting?

Financial transaction revolves around the system of dual entry. Every transaction affects at least two accounts, one is debited and the other one is credited. 

Every transaction affects at least two accounts, one is debited and the other one is credited. According to the Golden Rules of accounting, one needs to first determine the type of accounts affected by each transaction and then apply the principle to record transactions.

The role of journalising according to traditional approach is also known as “golden rules of accounting”. They are also called the traditional rules of accounting or the rules of debit and credit. As per the golden rules of accounting, you must ascertain the type of account for each transaction. Each type of account has its own set of rules that needs to be applied for each transaction. Following are the three golden rules of accounting:

The rules and journalising for these accounts

Types of Account	Debit	Credit
Personal Account	The Receiver	The Giver
Real Account	What Comes in	What Goes out
Nominal Account	Expenses and Losses	Income and Gains

Personal Account Rule  

It is an account of a person or an account relating to a person with whom a business keeps dealing. the accounts which relate to an individual, group of individuals, firm, company, or institute are considered to be personal accounts. 

There are three types of personal accounts: 

Natural Personal Account: Accounts of natural persons; i.e., accounts of particular human beings are considered in this. Example, Ram A/c, Mohan A/c, Creditors A/c, Debtors A/c, Drawings A/c etc.

In simple, they are accounts of human beings. e.g.- Received Rs.1000 from Sandeep

Cash (debit the receiver)	Debit
To Sandeep (credit the giver)	Credit

Artificial Personal Account: These accounts do not have the physical existence of a human being but a group of human beings working together is considered to be an Artificial Personal Account. For example, Company A/c, Partnership Firm A/c, Bank A/c, Club A/c etc.

In simple words artificial personal accounts of legal entities or organizations that are not natural persons.  e.g.- Deposited Rs.1000 in bank.

Bank (debit the receiver)	Debit
To Cash (credit the giver)	Credit

Representative Personal Account: When an account represents a particular person or group of persons, then it is called a Representative Personal Account. salary outstanding A/c, rent payable A/c, capital Account A/c, drawing account A/c, insurance paid in advance A/c etc.  

In simple term, Representative personal account that represents a person or a group of people. e.g.- Salary of ₹10,000 is due to employees but not yet paid.

Salary account - Debit (Debit Expenses - Real acc.)	Debit
To Outstanding salary acc.- Credit (credit the giver-services given to us)	Credit

Rules of Personal Account Rule:

1. Debit the Receiver
2. Credit the Giver

This rule applies to personal accounts. When a real or artificial person donates something to the organisation, it becomes an inflow, and the person must be credited in the books. Conversely, the receiver must be debited.

In Simple Words, Accounts related to firms, individuals or institutions. Debit the receiver money goes to someone, credit the giver money comes from someone.

Example – paid to landlord.

Landlord	Debit
To Cash	Credit

Real Account Rule

An account of property or anything owned or possessed by a business is called real account. A real account is an account where the closing balance of the accounts in a particular accounting automatically becomes the opening balance of the next accounting year. It can also be called permanent accounts.  All the accounts whose value can be measured in monetary terms whether tangible or intangible which belong to the business are called Real Accounts. 

There are two types of real accounts:

Tangible Real Accounts – The real accounts which can be touched, felt, measured, purchased, and sold. For example, Cash Account, Stock Account, Furniture Account, Machinery Account etc.

In simple term tangible accounts of those things which cannot be touched but their value can be measured in money. e.g.- Purchased machinery of Rs.1000 Machinery.

Machinery acc.- Debit (Debit what comes in)	Debit
To Cash- acc.- Credit (Credit what goes out)	Credit

Intangible Real Accounts – The real accounts which can not be touched but their value can be measured in terms of money. For example, Goodwill account, Patent account, Copyright account, Trademark account etc. In simple words, Intangible real accounts are those things which cannot be touched but their value can be measured in money. For e.g.- A company buys a patent for₹50,000.

Patent acc.- Debit (comes in)	Debit
To Cash acc.- Credit (goes out)	Credit

Rules of Real Account Rule:

1. Debit what comes in
2. Credit what goes out

This rule applies to real accounts. Furniture, land, buildings, machinery, etc., are included in real accounts. By default, they have a debit balance. As a result, debiting what is coming in adds to the existing account balance. Similarly, when a tangible asset leaves the firm, crediting what goes out reduces the account balance.

In simple words, all assets, tangible like cash, furniture & land and intangible like patents, goodwill etc. debit what comes in buy an asset and credit what goes out in sale an asset.

Example – Bought computer

Computer	Debit
To Cash	Credit

Nominal Account Rule  

An account relating to business expense income gain and loss is called nominal account. All the expenses and losses as well as all the incomes and gains come under Nominal Account. Expenses include Salaries Paid, Rent Paid, Discount Allowed, etc. and Incomes include Commission Received, Interest Received, Discount Received, etc. Nominal accounts ultimately transfer to the Profit & Loss Account. They show whether the business is making a profit or loss.

Rules of Personal Account Rule:

1. Debit all expenses and losses
2. Credit all incomes and gains

This rule applies to nominal accounts. A company’s capital is its liability. As a result, it has a credit balance. Crediting all the income and gains will increase the capital. On the other hand, the capital reduces when expenses and losses are debited.

In simple words, all income, expense, gains and losses. Temporary accounts that get closed at period end. Debit all expenses & losses reduce your profit debit them, credit all incomes & gains increase your profit credit them.

Example – Rent Paid

Rent	Debit
To Cash	Credit

FAQ's

What are the Golden Rules of Accounting?

The Golden Rules of Accounting are the basic principles used to record financial transactions under the double-entry system. They help in identifying which account to debit and which to credit in every transaction.

Why are the Golden Rules important?

They provide a systematic and consistent method for recording transactions accurately, ensuring the books of accounts are error-free and compliant with accounting principles.

How do the Golden Rules differ for debit and credit?

Each rule determines who receives, what comes in, and what type of transaction is happening. This helps identify whether to debit or credit an account in journal entries.

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