GOLDEN RULES OF ACCOUNTING

In a double entry system, due to its dual aspect, every transaction affects two accounts, one of which is debited and the other is credited. To record the transactions in the journal, in a sequential way, certain rules are required, and these rules are called as Golden Rules of Accounting.

Golden rules of accounting are used to record economic activity in books of accounts. These rules are formulated on the basis of three basic accounts, personal, real and nominal account. An account is a summarized record of the transactions relating to one person or thing or one class of income and expense.
Debit is abbreviated Dr. and credit is abbreviated Cr. The term debit means left, and credit means right. They do not mean an increase or decrease. The act of entering an amount on the left side of an account is called debiting. Making an entry on the right side is called crediting. Golden rules of accounting are based on the following basic accounts:

(a) Personal account: Accounts that deal with persons, i.e. human beings and artificial judicial persons such as companies, government organizations, HUF, etc.
(i) Natural personal account: Accounts that are concerned with natural human beings are called natural personal accounts. It includes accounts of debtors, creditors, proprietors, etc.
(ii) Artificial personal account: All the business concerned has a separate legal identity in the eyes of the law, and so the entities are different from their members. Therefore, the accounts of clubs, charitable trusts, companies, banks, etc are covered under this category.
(iii) Representative personal account: The accounts which represent persons or groups thereof, are called representative personal accounts, such as capital A/c, drawings A/c, prepaid A/c, and outstanding liability A/c.


(b) Impersonal account: As the name suggests, the accounts which are not personal are called impersonal accounts.

(i) Real account: Real Accounts are those accounts that show dealing in things or of property or possession 'Assets' which are owned by the business organization. Such as cash, building, bank account, and office furniture. Thus, an asset account is called a real account. In the case of a real account debit the account of assets that comes into the business and credit the account of that which goes out of the business. There are two types of real accounts:

- Tangible Account
- Intangible Account

Tangible assets are touchable assets having physical substance, such as machinery, stock, plant, furniture, cash, etc., and intangible assets are non-touchable assets such as patents, goodwill, copyrights, etc.
(ii) Nominal account: These are fictitious accounts, that are associated with expenses, losses, revenues, and gains of the firm, such as rent and rates account, traveling expenses A/c, the commission received A/c, interest paid A/c.
As far as business transactions are concerned, they are divided into three categories:
- Personal transactions.
- Transactions related to business assets.
- Transactions related to expenses, losses, incomes, and gains.
Personal transactions are recorded in a personal account, and transactions concerning assets and properties are covered in a real account. Lastly, transactions related to expenses losses incomes, and gains are considered in the nominal account. In short, the golden rules of accounting are provided for these three accounts only.