Every economic entity must present its financial information to all its stakeholders. The information provided in the financials must be accurate and present a true picture of the entity. For this presentation, it must account for all its transactions. Since economic entities are compared to understand their financial status, there has to be uniformity in accounting.
To bring about uniformity and to account for the transactions correctly there are three Golden Rules of Accounting. These rules form the very basis of passing journal entries which in turn form the basis of accounting and bookkeeping.
Types of accounts
To understand the Golden Rules of Accounting we must first understand the types of accounts. The account classification applies to all the types of general ledgers. In other words, every account will fall in one of the broad classifications given below. There are three types of accounts:
- Real Account
- Personal Account
- Nominal Account
A Real Account is a general ledger account relating to Assets and Liabilities other than people accounts. These are accounts that don’t close at year-end and are carried forward. An example of a Real Account is a Bank Account.
A Personal account is a General ledger account connected to all persons like individuals, firms and associations. An example of a Personal Account is a Creditor Account.
A Nominal account is a General ledger account pertaining to all income, expenses, losses and gains. An example of a Nominal Account is an Interest Account.
Golden rules of accounting
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