Legal Definitions - real account

In accounting, a real account refers to an account whose balance is carried forward from one accounting period to the next, rather than being closed out at the end of the period. These accounts represent the fundamental financial position of an entity, encompassing its assets (what it owns), liabilities (what it owes), and equity (the owner's stake). They are also known as permanent accounts because their balances persist over time, reflecting ongoing financial status.

• Example 1: A Company's Cash Account

  Imagine a small software development company, "CodeCrafters Inc." At the close of its fiscal year on December 31st, the company has $50,000 in its bank account. This "Cash Account" is a real account because the $50,000 balance does not vanish or reset; it becomes the starting balance for the new accounting period beginning on January 1st. It continuously represents an asset that the company possesses.

• Example 2: A Business Loan Payable

  Consider a local bakery, "Sweet Treats," which took out a five-year loan from a bank to purchase new ovens. The "Loan Payable Account" is a real account. Even after a year of making regular payments, the remaining balance of the loan is carried over to the next year. This account continuously reflects an ongoing liability (what the bakery still owes) that will persist on its books until the entire loan is repaid.

• Example 3: An Owner's Capital Account

  Sarah, a freelance photographer, operates her business as a sole proprietorship. Her "Owner's Capital Account" tracks her initial investment in the business and any subsequent contributions or withdrawals. If Sarah initially invested $15,000 into her business, that $15,000 balance (adjusted for changes) is a real account. It carries forward year after year, reflecting her cumulative ownership stake in the business, rather than being reset annually like temporary revenue or expense accounts.