In accounting, the Personal Account is one of three general categories of accounts under the traditional system of classification. It has transactions involving individuals, firms, or organizations. The Golden Rule of Personal Account is important for journal entries to ensure tracking amounts owed or received accurately.
This blog discusses what a personal account is, the fundamental rule that regulates it, and how it works in actual bookkeeping.
Introduction
In bookkeeping, each monetary transaction impacts a minimum of two accounts and proper account classification is the foundation of accurate accounting records. Accounts are typically divided into three general types – Personal, Real, and Nominal. Of these, the Personal Account concerns all natural or legal entities a company deals with in financial terms.
Whether paying a supplier, receiving cash from a customer, or paying a debt to a partner, a personal account is involved. Personal accounts track what is owed by or to the business. In order to book these transactions properly in the books, a person must obey a particular rule called the Golden Rule of Personal Account.
What is a Personal Account in Accounting?
A Personal Account is an account related to an individual, firm, company, or other legal entity. It reflects the financial relationship between the business and that person or organization.
These accounts can be further categorized into –
- Natural Personal Accounts – Relating to real persons (e.g., Mohan’s A/c, Ravi’s A/c)
- Artificial Personal Accounts – Relating to companies or organizations (e.g., SBI A/c, Infosys Ltd. A/c)
- Representative Personal Accounts – Representing a person or group indirectly (e.g., Outstanding Salary A/c, Prepaid Rent A/c)
In contrast to Real or Nominal accounts, which are concerned with assets or incomes/expenses, Personal Accounts are concerned with the relationships of debtor and creditor.
Golden Rule of Personal Account
The rule governing Personal Accounts is –
“Debit the Receiver, Credit the Giver.”
This means –
- If a person or entity receives value, their account is debited.
- If a person or entity gives value, their account is credited.
Example- If you pay Rs 10,000 to Mr. Raju for goods purchased.
Mr. Raju (Receiver of payment) → Credit
Cash/Bank (Asset going out) → Debit (as per Real Account rule)
But in terms of Raju’s account alone (personal), since he gave goods, he is the giver, so we credit his account.
The rule helps maintain clarity on who owes money and who is owed, which is crucial for balancing accounts and managing receivables/payables.
How Personal Account Differs from Other Account Types?
To fully grasp where personal accounts stand, here’s a quick contrast –
| Type | What It Represents | Golden Rule |
| Personal Account | Individuals, firms, or entities | Debit the Receiver, Credit the Giver |
| Real Account | Assets and properties | Debit What Comes In, Credit What Goes Out |
| Nominal Account | Incomes, expenses, losses, and gains | Debit All Expenses and Losses, Credit All Incomes and Gains |
This framework is part of the double-entry system and is a foundational concept in accounting practice.
Significance of Knowing This Rule
Knowing the Golden Rule of Personal Account “Debit the Receiver, Credit the Giver” is not merely an academic principle; it’s a useful accounting rule that is crucial in everyday business practice. The following are the reasons why –
- Guarantees Double-Entry Accounting to be Accurate – All transactions should possess the same amount of debits and credits. Abusing the rule might cause unbalanced accounts and accounting mistakes.
- Explains Financial Relationships – Personal accounts record the money owed by or to others such as customers, suppliers, lenders, and partners. This rule assists in keeping accurate, current records of those balances.
- Essential for Handling Debtors and Creditors – Companies must know their debtors (those who owe them money) and creditors (those they owe). This rule, correctly applied, assists in keeping payables and receivables current.
- Simplifies Reconciliation and Audits – In internal checks or external audits, properly maintained personal accounts simplify tracing transactions and explaining outstanding balances.
- Aids Legal and Tax Compliance – Personal account records are usually legal evidence of payment or outstanding due. They also aid in tax assessments by indicating proper payables and receivables.
- Foundation for Automated Accounting Software – The majority of contemporary accounting systems are founded on the same rule-based logic. Learning why and how entries are created enables users to work with the software more efficiently and detect errors in time.
Common Examples of Personal Accounts
Personal accounts are ubiquitous in business transactions whenever money is being transferred between persons or legal persons, a personal account is used. The following are some types that one is likely to come across –
- Customer Accounts (Accounts Receivable) – When you sell commodities or services on credit, the customer becomes a debtor. Their personal account records an amount they owe you.
- Supplier or Vendor Accounts (Accounts Payable) – When you buy on credit, the seller is a creditor. Their account reflects how much they are owed by you.
- Bank Accounts (Artificial Personal Accounts) – Banks are treated as artificial persons. When you make a deposit or withdrawal of money, your bank account reflects under the personal account principles.
- Loan Accounts – Whether you are borrowing from a bank or lending to someone, the account of the respective party maintains the outstanding loan amount.
- Capital and Drawings Accounts – The investment by the owner in the business (capital) and drawings for personal purposes are accounted as personal accounts, indicating the owner’s equity.
- Outstanding and Prepaid Accounts – These accounts for expenses or revenues due or paid in advance, such as outstanding rent or prepaid insurance. Although not individuals, they are obligations for person-related reasons and thus representative personal accounts.
Conclusion
The Personal Account Rules are the building blocks of proper and honest accounting. Using the “Debit the Receiver, Credit the Giver” rule, companies can properly account for who is owed and who owes them being transparent with all financial transactions.
It’s critical that students, accountants, and entrepreneurs who do their own books of accounts know this rule. The more automated accounting systems get, the more relevant each entry’s logic remains and that begins with a grasp of how to treat personal accounts properly.
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