Nominal Account – Definition with Examples
You just got to know the difference between cash and accrual basis accounting. Another accounting term that baffles some business owners is a nominal account. Nominal Accounts are general ledger accounts that are closed at the end of the fiscal year.
When do you use nominal accounts? And why would you use them?
Nominal Accounts: An Overview
Nominal accounts are temporary ledger accounts. The balance in the accounts is closed at the end of the fiscal year. This resets the account balance to zero at the start of the next accounting period.
Upon closing of the accounts, the balance is transferred to a permanent account. The purpose of keeping the nominal accounts is to summarize the inflow and outflow of the funds. It helps business owners get an overview of the income and expenses during a particular period.
Examples of Nominal Accounts
A simple example will help you understand the process of recording income and expenses in the nominal account.
Suppose that your company generated revenues of $15,000 during a month. The revenue can be recorded as follows.
Revenue 15,000
Income Overview 15,000
Now suppose that your company expenses during a month amount to $8,000. The outsourced bookkeeping service provider will make the following entry.
Income Overview 8,000
Expense 8,000
In the above example, Income Overview is the nominal account. The account will have a balance of $7,000 at the end of the year. This balance is closed at the end of the accounting year by transferring the balance to the retained earnings as follows.
Income Overview 7,000
Retained Earnings 7,000
What is the Difference between Nominal and Real Accounts?
Nominal and real accounts also cause confusion among business owners. The nominal account is a temporary account that you close at the end of the accounting year. In contrast, a real account is a permanent account that is left open.
You always start a nominal account balance with zero. Whereas you carryover the balance for the real account from the previous year.
You generally use nominal accounts to record the following types of business expenses.
- Revenue
- Operational expenses
- Gains on investment
- Losses on investment
And use real accounts to generally record the following business expenses.
- Assets
- Equity
- Liabilities
So, in general, you use nominal account for recording transactions related to the income statement and real accounts for recording transactions shown on the balance sheet.
Conclusion
Accounting software simplifies the task of creating and maintaining all types of accounts. And most professionals use accounting software to record transactions in general ledger accounts. This saves time and results in an accurate record of financial transactions.
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