Real account definition

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What is a Real Account?

A real account is an account that retains and rolls forward its ending balance at the end of the year. These amounts then become the beginning balances in the next period. The areas in the balance sheet in which real accounts are found are assets, liabilities, and equity. Real accounts also include contra asset, contra liability, and contra equity accounts, since these accounts retain their balances beyond the current fiscal year.

Presentation of Real Accounts

Real accounts are not listed in the income statement. All of the balances in the revenue, expense, gain, and loss accounts (known as nominal accounts or temporary accounts) listed in the income statement are flushed out to retained earnings at the end of each fiscal year, resulting in zero beginning balances in these accounts as of the beginning of the next fiscal year. Since retained earnings is a real account, this means that the balances in all nominal accounts are eventually shifted into a real account.

How do Auditors Use Real Accounts?

Auditors routinely review the contents of real accounts as part of their audit procedures. If they can verify that the ending balances in these accounts are justified, then by default all other transactions recorded by the client must have been flushed out through the income statement.

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Examples of Real Accounts

Examples of real accounts are as follows:

Real Account vs. Nominal Account

A real account retains and rolls forward its balance at the end of the year, while a nominal account represents the revenue, expenses, gains, and losses related to a specific accounting period. The key differences between these account types are as follows:

  • Nature of the account. The balance in a real account is carried forward to the next period, while the balance in a nominal account is closed at the end of the period (with its balance being shifted to the income statement).

  • Presentation. Real account balances are summarized in the balance sheet, while nominal account balances are summarized in the income statement.

Terms Similar to Real Account

Real accounts are also known as permanent accounts.