Understanding Real and Nominal Accounts in Accounting

Accounts play a crucial role in financial management, whether it's a simple checking account, a complex real estate asset, or a business's revenue and expense accounts. This article will delve into the concepts of real and nominal accounts, providing clear definitions, examples, and practical insights.

Real Accounts: Assets and Liabilities

In accounting, a real account refers to those accounts that track the physical existence of assets and the obligations or debts of a business. These accounts include tangible items like buildings, machinery, and furniture, as well as intangible assets such as goodwill.

Real accounts are typically classified into two categories: real accounts and nominal accounts. This article will focus on real accounts.

Real Accounts: A Deeper Look

Real accounts are records of tangible assets and liabilities. They can be further divided into subcategories such as personal accounts, property accounts, and capital accounts.

Personal Accounts

Personal accounts are used to record the financial transactions of individual entities, such as an individual or a company. For instance, a bank account allows individuals to deposit, withdraw, and manage their money. A checking account is a type of bank account that facilitates easy access to funds for everyday transactions, whereas a savings account allows funds to earn interest over time.

Additionally, we have social media accounts like Twitter or Instagram, which serve as platforms for individuals and businesses to share content, connect with others, and engage with a community.

Assets in Real Accounts

Real accounts include assets that are either physical or intangible:

Physical Assets: These include buildings, property, machinery, and furniture. Intangible Assets: These include goodwill, patents, trademarks, and copyrights.

The principles of accounting for real accounts involve debiting what comes in and crediting what goes out. For example:

Debit: When cash is remitted to a bank (Dr to Cash a/c), or when cash is withdrawn from a bank (Dr to Bank a/c). Credit: When cash is received (Cr to Cash a/c) or when cash is deposited (Cr to Bank a/c).

Liabilities in Real Accounts

Liabilities are duties and obligations that a business has, such as debts or sums owed to creditors.

Accounts Payable: This is a common liability account where a business records its payables to suppliers and vendors. Mortgages: A mortgage is a liability that typically extends over a period of years, such as the monthly payments on a property mortgage. Salaries and Wages Payable: This is a liability that represents the money owed to employees for work already performed but not yet paid. Leases Payable: This account tracks the payments due on leased assets, such as vehicles or equipment.

Nominal Accounts: Revenue and Expenses

While nearly all accounts can be classified as either real or nominal, the nominative accounts include revenue and expense accounts. These accounts are used to track financial transactions related to the day-to-day operations of the business.

Revenue Accounts

Revenue accounts record the income generated from the sale of goods or services. These accounts are often simplified as sales. For example, a business might have accounts like Office Supplies, Utilities, Phone, Travel Expense, Advertising Expense, Salaries and Wages, and Insurance Expense.

These accounts help businesses keep track of their expenses and revenue, which is essential for financial health and decision-making.

Conclusion

Understanding the different types of accounts—real and nominal—is crucial for anyone involved in financial management or accounting. By classifying accounts correctly, businesses can ensure accurate financial records and make informed decisions. Whether you're an individual with a bank account or a business managing various revenue and expense accounts, knowledge of these accounts will serve you well.

Keywords

account, real account, nominal account, assets, liabilities