Real Accounts in Accounting: Types & Examples

Real accounts, also known as permanent accounts, are types of accounts in accounting that represent tangible assets, liabilities, and equity. In accounting, there are mainly three main types of accounts. The second one is the Real Account or the permanent account. This type of general ledger account does not have a closure at the end of a financial year, rather the closing balances are accumulated and carried over to the next accounting period or financial year. In simple terms, the closing balance of the previous accounting year becomes the opening balance of the current accounting year. Thus, these real accounts are termed permanent accounts as the account remains open throughout the entity’s life.

The golden rule of real account is, Debit what is coming in and Credit what is going out.

Key Takeaways:

• Real accounts are also known as permanent and perpetual accounts as the closing balance of the current year is carried forward to the succeeding accounting year as the opening balance.
• Real accounts are listed on a balance sheet of an organization under assets, liabilities and equities categories.
• In accounting, real accounts depict the accounts related to the assets, liabilities, and equity. Also, contra assets, contra liabilities, and contra equity accounts are included in the real accounts.
• Real accounts are different from nominal accounts or temporary (personal accounts).

Real accounts are needed to maintain the financial status of an organization. There are three main types of real accounts:

1. Asset Accounts: The asset real account comprise of those components which are owned by the organization, and which are expected to generate some monetary value to the organization. Generally, there are two types of assets- tangible and intangible assets. The tangible assets includes cash, machinery, land, buildings, accounts receivable, inventory and investments. The intangible assets include goodwill, patents and copyrights.

2. Liability Accounts: All the debts and obligations of an organization comes under the liability accounts. The liabilities depict the responsibility of the organization to repay their creditors or fulfill any financial obligations. here, the liability accounts represents the accounts payables, loans or mortgage or notes payable, bonds payable and accrued expenses.

3. Equity Accounts: The equity account represents the owners’ rights over the assets of their organization. After deducting the liabilities, the residual claims of the assets are included in these equity accounts. It includes common stock, retained earnings, additional paid-in capital and dividends.

The above mentioned real accounts are essential for preparing the balance sheet, which depicts the picture of the financial status of an organization given at a particular period. These accounts are helpful in financial analysis as they predict the financial health and performance of the entity. Further, real accounts are included in closing entries, adjusting entries, and preparation of financial statements.

The real accounts are permanent accounts as they exist and continue to carry the previous years balances until and unless the organization or business is liquidated or the account of a particular asset, liability or equity is removed or settled.

The golden rule of accounting is also applicable for real accounts. The rule is “DEBIT what comes in and CREDIT what goes out”.

Using a real account, an organization should debit the account when something come into the organization such as assets. Similarly, the organization should credit the real account when something goes out from the organization such as liabilities.

Let’s assume you open a retail store and you possess a cash amount $50,000, fixed assets of $20,000 and inventory of $10,000. After running the store for few months, you generate revenue of say $60,000. Your cost of goods sold (COGS) amounted to $25,000, rent which you need to pay cost $2,500 and other additional expenses included $2,000.

Suppose your accounting period starts from 1st April to 31st March every year. At the end of the accounting or financial period, you report your revenue, cost of goods sold, rent and additional expenses on your profit/loss statement or income statement and find $30,500 as your net income. These accounts on your income statement are closed at the end of the accounting year.

The permanent accounts or the real accounts are carried over at the year-end. They are the retained earnings for the next year. Also, the real accounts become the opening balances at the beginning of the new accounting period. The opening balcne comprise the amount in cash, fixed assets and inventory accounts.

The permanent or real accounts, are the accountswhose balances are accumulated and continued to next accounting period. In simple words, the closing balance of one financial year of an organization becomes the opening balance of the succeeding financial year of the same organization. These accounts are tabulated in the balance sheet of the organization. Real accounts can be found in the assets, liabilities and equity sections of the balance sheet. These accounts remain active from the initiation of the organization until its end or liquidation. Hence, it is possible to possess a temporary zero balance in some of their real accounts in some accounting period.

What is the advantage and disadvantage of real accounts?

The advantage of real accounts is that it is easier to journal entry due to the golden principle applied for real accounts. Debit what comes in and credit what goes out. Whereas the disadvantage of real accounts is that if there occurs an error in calculating the closing balance of the accounting year, then this error would be carried forward to the next accounting period.

How do auditor use real accounts?

Auditors regularly check the items of real accounts as part of their audit proceedings. If they can verify that the closing balances of the real accounts are true, then automatically other transactions recorded by the organization in their income statement must have been flushed out.

What is the difference between nominal account and real account?

A nominal or temporary account is closed at the end of every financial year. Thus, there is zero balance at the beginning of every financial year. These accounts include revenues, expenses, profits/losses. Whereas, real or permanent accounts are those which continue to remain in the financial statements until the end of the business or entity. It includes the assets, liabilities and equity which are carried forwarded to every financial year.