In accounting, you deal with a variety of accounts to balance and organize your books. One type of account you will likely run into is a real account. But, what are real accounts exactly? And, how does it differ from other accounts in accounting? Allow us to give you the scoop with an overview, examples, and more.
What are real accounts?
So, what is a real account? A real account, or permanent account, is a general ledger account that does not close at the end of a period or at the end of the accounting year. Instead of closing, real accounts stay open, accumulate balances, and carry over into the next period or year. The amount in real accounts becomes beginning balances in the new accounting period.
Real accounts also consist of contra assets, liability, and equity accounts.
Your real accounts reflect your company’s financial status and can change from period to period because they’re active throughout the entire year.
Real account vs. nominal account vs. personal account
There are three accounts you deal with in accounting:
Each of these accounts come into play with the three golden rules of accounting (which we’ll touch on a little more later).
As you now know, real accounts are permanent and stay open from period to period, including at year-end.
But, what about nominal and personal accounts? How do they differ from a real account?
A nominal account, or temporary account, is essentially the opposite of a real account in accounting. Nominal account balances close at the end of the financial year. You record these accounts on your business’s income statement. Temporary accounts include revenue, expense, and gain and loss accounts.
A personal account is a general ledger account related to individuals or organizations, such as purchasing goods from Company XYZ.
Real account types
What are some types of real accounts? Here are a few examples of real accounts in accounting:
Again, real accounts can be broken down into asset, liability, and equity accounts on the balance sheet. For example, the cash account is a type of asset account, accounts payable is a liability account, and retained earnings is an equity account.
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Real accounts and the golden rules of accounting
Real accounts come into play with the golden rules of accounting. Specifically, with the rule “debit what comes in and credit what goes out.”
With a real account, when something comes into your business (e.g., an asset), debit the account. When something goes out of your business, credit the account.
Say you purchase new equipment for $3,000 in cash. Debit your Equipment account (what comes in) and credit your Cash account (what goes out).
See it in action: Real account example
You just opened a bakery and you have the following:
- Cash: $20,000
- Fixed assets: $30,000
- Inventory: $15,000
After a few months in business, you also have the following:
- Revenue: $35,000
- Cost of goods sold (COGS): $15,000
- Rent: $2,500
- Additional expenses: $1,500
Your accounting period goes from January 1 to December 31 each year. At the end of the year (or period), you report your revenue, COGS, rent, and other expenses on your income statement as $16,000 in net income. Accounts on your income statement close at year-end.
At year-end, you carry over your permanent accounts that are now your retained earnings into the new year. Your permanent accounts become your beginning balances at the beginning of the new period. And, your beginning balance consists of the amounts in your cash, fixed assets, and inventory accounts.
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