What is a Real Account?

//What is a Real Account?
What is a Real Account? 2017-10-10T02:28:20+00:00

Definition: A real account is a permanent account in the general journal that does not close at the end of a period. In other words, these accounts stay open allowing their balances to accumulate and carry over to the next period for the company’s lifetime.

What Does Real Account Mean?

What is the definition of real account? Real accounts reflect the current and ongoing financial status of a company because they carry their balance forward into the next accounting period. These accounts are typically reported on the balance sheet at the end of the year as assets, liabilities, or equity.

These account balances change throughout the accounting period. Management can review the extent of these changes by comparing initial and final balance of each account. The final balance will become reported on the balance sheet at the end of the period and will be carried over to the next period becoming the initial balance for the next accounting period.

The relationship between real and nominal accounts is that a change in one of them might derive in a change on the other. This means that if a nominal account increases or decreases it will increase or decrease a permanent account.

Let’s illustrate this concept with an example.

Example

Young Motors Co. is a startup company that produces motorcycles. Today is the first day of the company and its owners contribute the following things:

  • Cash: $30,000
  • Inventory: $25,000
  • Fixed Assets: $50,000

The company has no liabilities. After a few months of operations, the company has the following:

  • Revenues: $25,000
  • Cost of goods sold: $10,000
  • Rent: $5,000
  • Other Expenses: $1,500

The accounting period started on January 1 and it will end on December 31.

At the end of the period, the revenues, cost of goods sold, rent, and other expenses are reported on the income statement as an $8,500 net income. These accounts are then closed with year-end closing entries to the retained earnings account leaving the company with the following permanent accounts that will carry over into the next period:

  • Cash: $50,000
  • Inventory: $15,000
  • Fixed Assets: $50,000
  • Retained Earnings: $115,000

Summary Definition

Define Real Accounts: Real account means a general journal account that isn’t closed at the end of the year.