What is the Nominal Account?

Nominal Accounts are accounts related to and associated with losses, expenses, income, or gains. Examples include a purchase account, sales account, salary A/C, commission A/C, etc. The outcome of a nominal account is either profit or loss, which is then ultimately transferred to the capital account.

  • The nominal account is an income statement account (expenses, income, loss, profit). It is also known as a temporary account, unlike the balance sheet account ( Asset, Liability, owner’s equity), which are permanent accounts.So nominal accounting starts with a zero balance at the start of every accounting year. Then during the period, it accumulates all the gains and losses and returns to zero balance at the end of every accounting year by transferring/paying the amount/ balances to a permanent account.

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Nominal Account Example

Consider a temporary account like a sales account that is opened for recording the sale of goods and services during the year. The total sales are transferred to the revenue statement account at the end of the financial year. Similarly, expenses are recorded in the expense accountExpense AccountExpense accounting is the accounting of business costs incurred to generate revenue. Accounting is done against the vouchers created at the time the expenses are incurred.read more and, again at the end of the year, are transferred to the revenue statement account. Finally, the positive/ negative changes (Revenue- expenses) are transferred to a permanent account on the balance sheet.

Based on the periodicity of the flow of funds, the account is divided as below.

  • An Income is a short-term inflow of funds during the fiscal year.Expenses are the short-term outflow of the fund during the fiscal year.An asset is the long-term inflow of funds whose time horizon can be spread over multiple years to calculate asset value as a present value of future cash flow.A Liability is a long-term outflow of a fund that extends beyond the financial year.

The Rules of Nominal Account

The golden rules to record any transaction under nominal accounts are:

1.) Debit all the expenses and losses.

2.) Credit all the income and gains.

Let us understand the rules of a Nominal account with the help of an example:

Suppose a good is purchased for Rs.15,000 in a cash transaction. We are affecting two accounts to record this transaction, i.e., purchase and cash.

The amount will be Rs. 15,000 in both debitDebitDebit represents either an increase in a company’s expenses or a decline in its revenue. read more and credit.

Transferring Fund from Nominal Account to Real Account

The following journal entries show how the balances in nominal ac are shifted through an income summary account to the retained earnings account-Retained Earnings Account-Retained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more

#1 – Shift all Rs. 10,000 of revenuesRevenuesRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more generated during the month to the income summary account

#2 –  Shift all Rs. 9,000 of expenses generated during the month to the income summary account (there is assumed to be just one expense account)

#3 – Shift the Rs. 1,000 net profit balance in the income summary account to the retained earnings account

The preceding entries can be completed manually. However, an accounting software package will handle the transfer tasks automatically once an authorized user sets the rollover flag in the software to close the old reporting year and shift recordkeepingRecordkeepingRecordkeeping is a basic accounting stage that teaches us how to keep track of monetary business transactions with the goal of keeping a permanent record of all transactions, knowing the correct picture of assets-liabilities, profits and losses, etc., keeping control of expenses with the goal of minimizing expenses, and having important information for legal and tax purposes.read more to the next fiscal year.

Difference Between a Nominal Account and a Real Account-

When we differentiate these two accounts, the main parameter we consider is the balances in these accounts at the end of the fiscal year.

  • This account starts with zero balance and ends with zero balance, so only this account is called a temporary account. Whereas the balance in a real account does not reset to zero at the end of fiscal yearEnd Of Fiscal YearFiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. Some of the most commonly used Fiscal Years by businesses all over the world are: 1st January to 31st December, 1st April to 31st March, 1st July to 30th June and 1st October to 30th Septemberread more, last year’s balances get carried forward to the next fiscal year.These are income statement accounts, i.e., accounts for recording income, expenses, profit, and losses. In contrast, a real account is linked with a balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more account, i.e., accounts for recording assets, liabilities, and owner’s equity.At the end of every fiscal year, the balances in the nominal (temporary accountTemporary AccountTemporary accounts are nominal accounts that start with zero balance at the beginning of the financial year. The balance is visible in the income statement at the year-end and then transferred to the permanent as reserves and surplus.read more) account are transferred to a real account (temporary account) for the net change during the accounting year. The nominal account rule is reset to zero, and the balance is carried forward to a real account.Entries in the nominal account are recorded as per the journal entries concerning time and date.

Nominal Account Video

This article has been a guide to what is Nominal Accounts. Here we discuss the golden rules to record any transaction with examples. Also, we discuss the Nominal account vs. Real Account. Here are the other articles in accounting that you may like –

  • Income Summary AccountDrawing AccountSingle Entry System AccountingAccounting Break Even