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 classified into two main types: temporary accounts and permanent accounts.
- Permanent accounts (also known as real accounts) are those that carry their balances into the next accounting period. These accounts reflect the financial position of the company and are not closed out at the end of each period. They include:
- Assets (e.g., Cash, Accounts Receivable, Equipment)
- Liabilities (e.g., Accounts Payable, Long-term Debt)
- Equity (e.g., Owner’s Equity, Retained Earnings)
- Temporary accounts (also known as nominal accounts) are closed at the end of each accounting period. These accounts measure performance over a period and are reset to zero for the next period. They include:
- Revenue accounts (e.g., Sales, Service Revenue)
- Expense accounts (e.g., Rent Expense, Salaries Expense)
- Dividend accounts
Analysis of the options:
- Goodwill: This is an intangible asset that arises when a company acquires another company at a price higher than the fair market value of its net assets. Goodwill is a permanent account because it is recorded as part of a company’s assets on the balance sheet and remains until it is either impaired or the company is sold. It does not get closed out at the end of the period.
- Sales: Sales is a temporary account. It is a revenue account that records income generated from business operations and is closed to retained earnings at the end of the period. As a result, it is not a permanent account.
- Accounts Receivable: This is a current asset account and is a permanent account. It reflects amounts owed to the company by customers. It carries its balance forward to the next period and is not closed out.
Thus, both Goodwill and Accounts Receivable are permanent (real) accounts, which makes d. Both Goodwill and Accounts Receivable the correct answer.