Real Accounts - Overview, Types & Examples

A business works for effectiveness by spending a lot of money on its resources and inputs. Hence, it becomes crucial for the owner to check whether the company performs well as planned. Financial data plays a significant role in framing such conclusions. According to Wikipedia, “Accounting, also known as accountancy, is the measurement, processing and communication of financial and non-financial information about economic entities such as businesses and corporations.” Accounting comprises some ground rules to make data comparable. Classification of accounts into Real, Personal and Nominal accounts is one of the foundation steps in accounting. According to this classification, accounting gives a double-entry effect for every transaction, wherein if one is debit, the other one is credit. Every transaction has a dual impact on a double-entry book-keeping system. 

Did you know?

A capital account is the account of a natural person, i.e. an account of the person who is alive. Hence, we can classify it as a personal account.

The Difference Between Real, Personal and Nominal Accounts

In accounting terminology, we can classify accounts into three main types:

1. Real accounts
2. Nominal accounts
3. Personal accounts

Based on the golden rules of accounting, we can classify ledger accounts under the above main heads, and each one has a different role to play. 

1. Real Accounts

As explained earlier, Real accounts denote assets, liabilities and equity. Like, such as bank accounts, gold deposits accounts, inventory accounts, patent accounts, business loan accounts, etc. These accounts have accumulated balances that are carried forward to coming years.

Also Read: Trial Balance: Rules Explained With Examples

2. Nominal Accounts

Unlike Real accounts, Nominal accounts close in the same financial year and do not contain any accumulated balances. Instead, organisations transfer them to the income statement at the end of the year. In this manner, each year includes figures in nominal accounts that pertain specifically to that year only. The nominal accounts represent gains or profits, losses, expenses and incomes. The accounts classified as personal accounts generally contain gain or loss occurring in a particular transaction which ultimately helps decide whether the company has earned profit or suffered a loss. For example, it determines if the company has a rent account, loss by fire account, conveyance account, interest received account, salary account, the commission received account, discount received account, etc.

3. Personal Accounts

On the other hand, these accounts are specific to people, enterprises, institutes, companies, etc. They represent natural persons like Ram’s account, Ritesh’s account, Malini’s account, etc., artificial persons like Helpers Charitable Trust, ABC Traders, Big Shoppers Ltd., etc., or representative personal accounts like outstanding insurance account, wages payable account, etc. Like real account balances, personal account balances are carried forward to the next accounting year unless an individual settles the dues against the said accounts in the year.

What Are Real Accounts?

A Real account is a general ledger account that does not close at the end of the accounting year. The balance accumulated in the real accounts is carried forward to the next accounting year, where you can accumulate the further credit of that accounting year in such accounts. These accounts stay open over the years unless you nullify the balance via any activity related to such accounts like sales or transfers. Hence, these accounts are also called Permanent accounts.

Real accounts represent assets, liabilities, shareholder’s equity or capital. Examples of Real accounts are cash, furniture, machinery, loans, banks, investments, land, equity, etc.

Types of Real Accounts

We can classify Real accounts into two types:

• Tangible Real Accounts

These real accounts represent objects or assets that can be touched or are tangible—for example, land accounts, cash accounts, fixed deposit accounts, stock accounts, etc.

• Intangible Real Accounts

These real accounts represent assets that are intangible and cannot be touched—for example, copyrights accounts and goodwill accounts.

Real Accounts and the Golden Rules of Accounting

As stated earlier in this article, accounts follow specific rules. Each type of account has to follow golden rules regarding the accounting mechanism to get the desired results. The golden rules of accounting help understand which particular account you should debit and which one should you credit for a given transaction. With these golden rules, the double effect of any transaction in accounting is possible, which helps the balance sheet tally.

Following Are the Golden Rules of Accounting:

Real Accounts:

• Debit what comes in.
• Credit what goes out.

Nominal Accounts

• Debit the expenses and losses.
• Credit the incomes and gains.

Personal Accounts

• Debit the receiver.
• Credit the giver.

Also Read: What is Double Entry System of Accounting

Representative Personal Accounts

• Debit the debtor.
• Credit the creditor.

There might be transactions containing both real accounts in the debit and credit. 

For Example, Cash deposited in the Bank of ₹5,000:

Bank Account Dr. ₹5,000

To Cash Account ₹5,000 

In the above example, both accounts used, ‘Cash A/c’ and ‘Bank A/c’, are real accounts.

However, there can be transactions containing one real account and another personal or nominal. For example, a Salary of ₹50,000 is paid by cheque.

 Salary Account Dr. ₹50,000

 To Salary Payable Account ₹50,000

 Salary Payable Account Dr. ₹50,000   

  To Bank Account ₹50,000   

The above example shows the salary amount as playable by debiting the salary account (Nominal account – debit the expense) and crediting the salary payable account (Representative Personal account – credit the creditor). Later, this salary is paid off by debiting the payable salary account (Representative Personal account – debit the debtor) and crediting the bank account (Real account – credit what goes out), closing the salary payable account. Here, in this accounting year, you can transfer the salary account to the income statement to show an expense of ₹50,000 to the debit of the income statement, and the bank account, which is a real account, will be reduced by ₹50,000, in the balance sheet.

Practical Examples

1. Purchased goods worth ₹12,000 from MS Enterprises.

1. Paid wages of ₹10,000 in cash

1. Purchased land worth ₹500,000 from Envy Builders' entire amount due.

1. Rent paid by cheque ₹ 6,000.

1. Furniture costing ₹15,000, the written down value of which is ₹12500, is sold for ₹9,500.

Conclusion

We can conclude that 'types of accounts' is a topic one cannot study in seclusion. Any given transaction may include a mixture of multiple accounts. Real accounts help form the balance sheet indicating the balances to be carried forward to the next accounting year. Any increase in assets leads to a debit of the respective real account for real accounts, and Similarly, any decrease in assets leads to a credit of the respective account. In the case of liabilities, any increase in liability leads to a credit to the respective ledger account. Any decrease in liability leads to a debit of the respective ledger account. Real accounts and Personal account balances and the equity and retained earnings show the company's financial position on the balance sheet on a specific date.

The main head of Accounts Payable and Accounts Receivable are Real accounts; however, the specific accounts mentioned under each type to show the balances due or receivable from the respective persons are personal accounts. For example, the balance sheet shows accounts receivable of ₹20,000, which is a Real account. However, in this ₹20,000, ₹12,000 is receivable from Raj Trust, and ₹8,000 is from Diana Ventures Ltd. These accounts, i.e. Raj Trust and Diana Ventures Ltd, are Personal Accounts.

Based on the golden rules, organisations pass journal entries in financial statements. Companies post these journal entries to ledgers. All ledger balances are closed and transferred to the income statement or are carried forward and shown on the balance sheet. Without account classification, the financial statements you cannot prepare accounts systematically and comparably.

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