Real Accounts Definition
Real Accounts are the accounts that do not close its balances at the end of the financial year but the same retains and carries forward its closing balance from one accounting year to another and so on. In other words, the closing balance of these accounts in one accounting year becomes the opening balance of the succeeding accounting year. These accounts are also called as permanent accounts.
The golden rule that applies to a real account is that the organization should debit what is coming in the organization and credit the items that are going out of the organization.
Examples of Real Accounts
The following are the items that are present in the financial statement of the company that is considered to be examples.
#1 – Assets
Any resource of the business organization which is owned by the organization and has a monetary value that can help to generate revenue and is also available to meet the liabilities of the organization are the assets of the business. The assets are further classified into two different categories which are as follows:
- Tangible Assets: The assets that can be seen or touched are considered tangible assets. The example of the tangible assets includes cash, furniture, inventory, building, machinery, etc.
- Intangible Assets: The different assets that cannot be felt or touched are considered as intangible assets. Examples of intangible assets include patents, goodwill or trademark, etc.
#2 – Liabilities
These are the legal, financial obligations that an organization owes to someone else. Examples of liabilities are loans payable, accounts payable, which include creditors, bills payable, etc.
#3 – Stockholder’s Equity
Shareholders Equity is the value of assets that are available for the shareholders of the company after the payment of the due liability. The examples of the same are retained earnings, common stock, etc.
Journal Entries of Real Accounts
Let’s take the example of Mr. X, who has a business in the purchase and sale of the different mobile phones in the area where its business is situated. In the business, he purchased furniture, having a value of $5,000 by paying cash for the same. Analyze the same considering the real accounts.
In the case of the above example, the journal entry for the transaction in the books of accounts of Mr. X will be as follows:
In the above journal entry, there is an interaction between two different types of assets, i.e., furniture and the cash account, which are classified as the real accounts. Firstly, the furniture account is debited as per the rule, i.e., debit what comes in, and the cash account is credited as per the rule credit what goes out. Both are reported in the balance sheet of the company.
The advantages are as follows:
- It becomes easier to do journal entry because of the rule of debit what comes in and credits what goes out as it clarifies on which side, i.e., on the debit side or the credit side is needed to be posted.
- It provides the closing balance of the assets and the liabilities that are reported in the balance sheet and then carried forward in the next accounting year.
The disadvantages are as follows:
- If there is an error in the closing balance of the real accounts in any accounting year, then in the next accounting year also the same error gets carried forward. It happens as the closing balance of one accounting year is the opening balance of the succeeding accounting year.
The different important points are as follows:
- These accounts are shown on the balance sheet of the organization, which reports the stakeholder’s equity, liabilities, and the assets of the business.
- The word ‘Real’ here refers to the permanent and perpetual nature of these accounts. These accounts remain active from the beginning of the business until its end.
- The golden rule that is applicable is that the organization should debit what is coming in the organization and credit the items that are going out of the organization.
Real accounts, also known as the permanent accounts, are the accounts balances that are carried from one financial year to another accounting year. i.e., the closing balance in one accounting year of the company becomes the opening balance of the succeeding accounting year in its balance sheet. Examples include the assets, liabilities, and the Stockholder’s equity. It remains active from the beginning of the business until its end. It is possible to have a temporary zero balance in some of these accounts.