Double Entry System: Personal Real and Nominal Accounts and Golden Rule of Accounting

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Double Entry System

Accounting transactions are recorded in the books of accounts in a systematic manner. The principle, which has followed to maintain the transactions are termed as, “double entry system”. This is based upon the dual aspect concept, which has discussed in the module I of the lesson, that implies every debit transaction there is a corresponding credit transaction of an equal amount which exists in the accounting system. The entry has to reflect in both the side of the books. In some places it is also been referred as two-fold aspect of accounting.

Advantages of Double Entry System

The double entry book keeping system has several advantages are as follows:

  • The transactions are recorded in a very scientific way to provide most reliable information to the business.

  • Alteration of accounts is not permissible in this system of method of accounting.

  • By retrieving data from the books of accounts, trial balance can be prepared to check the arithmetical accuracy of the accounting records.

  • All personal as well as real accounts details are being recorded in the books of accounts to prepare a balance sheet at the end of the accounting year.

  • It helps the owners to trace out the transactions and compare the business progress with respect to previous years.

To record the financial transactions in a systematic manner the accountant should be aware about the classifications of accounts based on their nature. Which avoids duplication of the transactions in the books of accounts. On the basis of their nature accounts are classified are as follows:

Classification of Accounts

Classification of Accounts

Classification of Accounts

Personal Accounts

It implies the recording of the transactions in the name of individuals in the books of accounts. It is further classified as;

  • Natural Personal Accounts: It refers to the natural persons means human being. Eg: Rama, Shiba, Gopal.

  • Artificial Personal Accounts: These accounts include accounts of corporate bodies which are created by law, Eg: ABC Ltd., XYZ Insurance Co Account etc.

  • Representative Personal Accounts: It refers to the accounts which represents a certain person or group of persons and it also indirectly assigned to that persons to whom the transaction refers to. Eg: Outstanding Salary, which implies the outstanding towards the employees who are about to receive the salary from the concerned organisation.

Real Accounts

These accounts are normally belonging to the property of the business which are used in the course of operation of the business. It is further classified are as follows:

  • Tangible Real Accounts: It refers to the accounts which are tangible such as that can be seen and touched physically. Eg: Land and Building, Plant and Machinery etc.

  • Intangible Real Accounts: These accounts represent those items which cannot be touched physically, but can be measured in terms of money. Eg: Goodwill, Patent, Trademark, Copyright, Technical knowhow.

Nominal Accounts

These accounts are mainly meant for recording of the expenses and the incomes of the organisations. Eg: salaries paid to the employees, rent paid to the landlord; wages paid to the workers are to be recorded under this heading of accounts.

Golden Rule of Accounting

The accounting transactions are to be recorded in the books of accounts based on the golden rule which is widely accepted in the accounting domain. The above-mentioned classes of accounts are to be recorded based on this principle, which is mentioned are as follows:

Debit and credit difference

Debit and Credit Difference

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