Which of the following is a real (permanent) account?
a. Goodwill
b. Sales
c. Accounts Receivable
d. Both Goodwill and Accounts Receivable
The correct answer and explanation is :
The correct answer is d. Both Goodwill and Accounts Receivable.
Explanation:
In accounting, accounts are categorized into two main types: permanent (real) accounts and temporary (nominal) accounts. Understanding the difference between these types of accounts is essential to comprehending financial reporting and the overall accounting cycle.
1. Permanent (Real) Accounts:
Permanent accounts are those that remain open and are carried forward from one accounting period to the next. These accounts reflect the ongoing financial position of a business, and their balances are not reset to zero at the end of an accounting period. The most common examples of permanent accounts include assets, liabilities, and equity. These accounts accumulate and hold balances that reflect the long-term financial health and operations of a business.
- Goodwill: This is an intangible asset that arises when a company acquires another business for a price higher than the fair value of its net identifiable assets. Goodwill is a permanent account because it is recorded on the balance sheet and does not close at the end of the accounting period. The balance in this account is carried forward indefinitely unless there is an impairment loss or a sale of the goodwill.
- Accounts Receivable: This account represents money owed to the business by its customers for goods or services delivered on credit. Like other asset accounts, accounts receivable is a permanent account because it is reported on the balance sheet and carries its balance forward from one period to the next.
2. Temporary (Nominal) Accounts:
Temporary accounts, in contrast, are used to record financial activity during a specific accounting period. These accounts include revenues, expenses, and dividends. At the end of the period, the balances in these accounts are reset to zero, and their balances are transferred to the equity accounts.
- Sales: This is a revenue account, and it is temporary because it records the sales revenue for a specific period. At the end of the period, the balance in the sales account is transferred to the retained earnings or equity account.
Thus, Goodwill and Accounts Receivable are both permanent accounts, while Sales is a temporary account.