Definition
Real accounts, in finance, refer to permanent accounts in the general ledger that track the ongoing financial activities of a business. These accounts include assets, liabilities, and equity accounts. They do not close at the end of the accounting period, their balances are carried forward to the next period.
Key Takeaways
- Real accounts, also known as permanent accounts, refer to the accounting records that accumulate balances over time, such as asset, liability, and equity accounts. The information they contain is carried over from one accounting period to the next.
- Real accounts are not closed at the end of the accounting period, therefore, they are always open to record transactions. This distinct characteristic allows a company to track its financial position over multiple periods.
- The balance in real accounts provides valuable data for financial analysis and can contribute significantly to business decision-making processes. It helps in understanding the financial health and long-term sustainability of a company.
Importance
Real accounts, also known as permanent accounts, are integral to the field of finance because they help to provide an accurate reflection of a company’s financial state.
These types of accounts include assets, liabilities, and equity accounts which persistently show the financial health of a business from its inception to the current date.
The balances in these accounts do not close at the end of an accounting period but carry forward to the next one.
This ongoing record-keeping provides critical data for financial analysis, decision-making, strategic planning, and it allows businesses to track their financial performance over time, supporting transparency and accountability.
Hence, the importance of real accounts is pivotal for both internal and external stakeholders.
Explanation
Real accounts, also often referred to as permanent accounts, are pivotal aspects of a company’s financial structure. The primary purpose of real accounts is to keep track of a company’s actual, tangible assets— this includes property, equipment, and cash resources.
By doing so, the management team can analyze the company’s financial wellbeing, make decisions based on current assets, and plan for future growth or expansion. Real accounts are always open and continue from one accounting period to another, allowing for accumulation of the company’s financial information over a longer period of time.
Additionally, real accounts may include other areas such as revenue, expenses, gains, and losses—all these are tied directly to the company’s financial position and performance. These accounts have a crucial role in generating vital reports such as the balance sheet, which displays the company’s assets, liabilities, and shareholders’ equity.
By maintaining and reviewing real accounts, businesses can evaluate their financial health, identify trends, and create strategies to maximize profitability. Therefore, the use of real accounts is fundamental to effective financial planning and evaluation.
Examples of Real Accounts
Buildings and Machinery: In most businesses, assets such as buildings and machinery are considered real accounts. These are tangible items whose value can be measured in monetary terms directly. In financial accounting, these are considered real accounts and are recorded in the balance sheet.
Bank Account: A company’s bank account is another example of a real account. This account reflects the actual amount of money a company has in the bank at a given time. All transactions relating to the inflow and outflow of money are recorded in this real account.
Patents and Copyrights: These are intangible assets, but they are still considered real accounts because they hold a tangible monetary value. Patents and copyrights often represent significant investments by companies and can produce substantial economic benefits over time, therefore they are recorded as real accounts in the balance sheet.
FAQ for Real Accounts
What is a Real Account?
A Real Account is a general ledger account related to all the assets, liabilities, and Capital of the business. It is a term used in accounting to define accounts such as assets, liabilities, and capital, which are permanent or nominal in nature.
What are examples of Real Accounts?
Examples of Real Accounts include cash accounts, accounts receivable, fixed assets accounts, accounts payable, loans payable, share capital accounts, and more. These accounts do not close at the end of the financial year and are carried over.
What is the golden rule for Real Accounts?
The golden rule for Real Accounts is “Debit what comes in, credit what goes out”. It means that if a business is receiving an asset, it is debited, and if it is losing an asset, it is credited.
What is the difference between Real Accounts and Nominal Accounts?
Real accounts are related to properties or legal rights, have a balance at the end of the year, and carried forward to the next year. On the other hand, nominal accounts are related to revenue, expenses, gains, or losses, closed at the end of the accounting year.
How is a Real Account posted?
A Real Account is posted by debiting the receiver and crediting the giver. For example, if a business purchases machinery, it debits the machinery account and credits the bank or cash account from where the payment is made.
Related Entrepreneurship Terms
- Balance Sheet
- Asset Accounts
- Liability Accounts
- Equity Accounts
- Permanent Accounts
Sources for More Information
- Investopedia: This is a reliable source for all things finance, from basic concepts to complex strategies.
- Accounting Tools: A helpful platform focused on accounting, viewer-friendly for both beginner and advanced level learners.
- My Accounting Course: This site offers free online courses and informative articles about various facets of accounting.
- Accounting Coach: A well-organized site that offers tutorials, quizzes, and tests to help you master accounting and finance concepts.
