Real Accounts

Definition

Real Accounts are specific ledger accounts used to record and track tangible property and certain types of assets such as land and buildings, plant and machinery, and investments. Traditionally, these were distinguished from nominal accounts, which deal with revenues and expenses like sales and motor expenses. Though this distinction has become largely outdated, with both real and nominal accounts being tracked in the nominal ledger, understanding real accounts remains fundamental in accounting.

Examples

Land and Buildings Account: Records the cost and value adjustments related to land and buildings owned by a business.
Plant and Machinery Account: Tracks information about any industrial equipment and machinery.
Investments Account: Maintains details of long-term and short-term investments made by the business.
Inventory Account: Records stock levels of goods purchased or produced for sale.

Frequently Asked Questions

What is the difference between a real account and a nominal account?

A Real Account deals with assets, both tangible and intangible, while a Nominal Account deals with revenues, costs, expenses, and gains. Real accounts show up on the balance sheet while nominal accounts affect the income statement.

Are real accounts still relevant in modern accounting?

Although the distinction between real and nominal accounts is less emphasized today, real accounts are still essential as they track the actual assets owned by a business, which are crucial for preparing the balance sheet.

How are real accounts closed?

Real accounts are considered permanent accounts. They are not closed at the end of the accounting period but are carried forward to the next accounting period.

Why are real accounts referred to as permanent accounts?

Real accounts are called permanent accounts because their balances are not reset to zero at the end of each accounting period. They carry forward their balances continuously.

What is the main ledger called where both real and nominal accounts are kept?

The main ledger where both types of accounts are kept is usually referred to as the Nominal Ledger or General Ledger.

Ledger Account: An account or record used to sort and store balance sheet and income statement transactions.
Nominal Account: Accounts that are used to record revenues, expenses, and other transactions that affect the income statement.
Nominal Ledger: Also known as the General Ledger, it is where a company’s detailed accounting records are primarily maintained.
Assets: Resources owned by a company as a result of past events and from which future economic benefits are expected to flow.

Online Resources

Suggested Books for Further Studies

“Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
“Principles of Accounting” by Belverd E. Needles, Marian Powers
“Financial Accounting” by Walter T. Harrison Jr. and Charles T. Horngren

Accounting Basics: “Real Accounts” Fundamentals Quiz

### What is a real account? - [ ] An account that records income and expenses. - [x] An account that records tangible assets and property. - [ ] An account used temporarily within a fiscal period. - [ ] An account that only records cash transactions. > **Explanation:** A real account records tangible assets and properties owned by the business, such as land, buildings, and equipment. ### Are real accounts permanent or temporary? - [x] Permanent - [ ] Temporary - [ ] Both - [ ] It depends on the accounting cycle > **Explanation:** Real accounts are permanent accounts because their balances are not closed at the end of an accounting period; they are carried forward to the next period. ### Which of the following is an example of a real account? - [ ] Sales Revenue - [ ] Advertising Expense - [x] Inventory - [ ] Utility Expense > **Explanation:** Inventory is an example of a real account as it is a tangible asset owned by the business and recorded in the balance sheet. ### Where are real accounts recorded? - [x] Nominal Ledger - [ ] Cash Flow Statement - [ ] Profit and Loss Statement - [ ] Revenue Ledger > **Explanation:** Real accounts are recorded in the Nominal Ledger (or General Ledger), which contains all the financial accounts of a company. ### What type of assets do real accounts track? - [ ] Only intangible assets - [ ] Only financial assets - [x] Both tangible and intangible assets - [ ] Only long-term liabilities > **Explanation:** Real accounts track both tangible assets (like land and machinery) and intangible assets (like patents and trademarks). ### Are real accounts zeroed out at the end of the accounting period? - [ ] Yes, always - [ ] Yes, for certain types of businesses - [x] No, they are carried forward - [ ] It varies year by year > **Explanation:** Real accounts are not closed out at the end of the accounting period; their balances are carried forward into the next accounting period. ### Why are real accounts called permanent accounts? - [ ] Because they only record long-term transactions - [ ] Because they are used specially in permanent organizations - [x] Because their balances are carried forward continuously - [ ] Because they never change > **Explanation:** Real accounts are called permanent because their balances are continuously carried forward and do not reset at the end of the fiscal year. ### What is another term commonly used for the Nominal Ledger? - [ ] Expense Ledger - [ ] Asset Ledger - [x] General Ledger - [ ] Revenue Ledger > **Explanation:** The Nominal Ledger is also commonly referred to as the General Ledger, which encompasses all the financial accounts of a company. ### What kind of balance do real accounts usually have? - [ ] Credit balance - [x] Debit balance - [ ] Depends on the year - [ ] No balance at all > **Explanation:** Real accounts typically have a debit balance because they account for assets which are expected to provide future economic benefits. ### Which financial statement includes information from real accounts? - [ ] Income Statement - [x] Balance Sheet - [ ] Cash Flow Statement - [ ] Statement of Retained Earnings > **Explanation:** The Balance Sheet includes information from real accounts as it provides a snapshot of the company's financial position, detailing assets, liabilities, and equity.

Thank you for exploring the intricacies of real accounts through this thorough guide and challenging quiz! Continue your journey in sharpening your financial acumen.