Real accounts are ledger tallies in a company’s bookkeeping system that relate to tangible assets and obligations, such as property owned or debts due. All ledger accounts are classified as either real, nominal, or personal. Real accounts are considered permanent accounts because their end-of-the-year balance carries over to the next year on a company’s balance sheet instead of being zeroed out with debit and credit entries. The four types of real accounts are asset, liability, reserve, and capital.
Every company must implement a bookkeeping system to manage its finances, evaluate its financial position, and meet its regulatory and tax obligations. The bookkeeping is an integral part of the financial accounting system that dictates the conventions and standards a jurisdiction adopts to normalize reporting across its business and financial industries. Most accounting systems use a slate of accounts that are classified as real, personal, or nominal, and then record transactions to the accounts under those classifications through a process of double-entry bookkeeping. Each transaction is recorded twice, with a credit on one side of the books and a debit on the other.
Real accounts are those accounts that correspond to items the company owns or obligations it must pay, which include assets, liabilities, reserves, or capital contributions. These items carry over from year to year because a company doesn’t sell off all of its assets every year, nor does it typically pay off all of its debt. Nominal, or temporary, accounts are the opposite of real accounts. These accounts represent the inflow and outflow of cash and are zeroed out at the end of the year through a debit-credit double entry, such as profit and loss accounts and expense and earnings accounts. Personal accounts represent amounts due from or owed to people or entities.
Every year, a company produces financial statements from the company’s books, sometimes as part of an independent audit. One of the most important statements generated is the balance sheet. This statement presents a picture of the company’s financial position at a point in time, which may be the end of its fiscal year. The balance sheet represents a financial equation, and setting it up properly enables a company to determine how much it has in assets, liabilities, or equity. Categorizing accounts as real, nominal, or personal allows an accountant to plug the right numbers into the right places on the balance sheet to accurately reflect the company’s condition.