Nominal Account vs. Real Account

Attribute	Nominal Account	Real Account
Nature	Income, expenses, gains, and losses	Assets, liabilities, and equity
Classification	Temporary	Permanent
Carry forward	Transferred to the next accounting period	Carried forward indefinitely
Balance	May have a debit or credit balance	May have a debit or credit balance
Examples	Revenue, expenses, gains, and losses	Cash, accounts payable, equity

Introduction

When it comes to accounting, there are various types of accounts that are used to record financial transactions. Two important types of accounts are nominal accounts and real accounts. While both types serve different purposes, they are essential for maintaining accurate financial records. In this article, we will explore the attributes of nominal accounts and real accounts, highlighting their differences and importance in the accounting world.

Nominal Accounts

Nominal accounts, also known as temporary accounts, are used to record revenues, expenses, gains, and losses. These accounts are opened at the beginning of an accounting period and closed at the end of the period to determine the net income or net loss. The balances of nominal accounts are transferred to the retained earnings or income statement at the end of the accounting period.

One key attribute of nominal accounts is that they are reset to zero at the start of each accounting period. This allows for a fresh start in recording revenues and expenses for the period. Examples of nominal accounts include sales revenue, salaries expense, rent expense, interest income, and advertising expense.

Nominal accounts are crucial for determining the profitability of a business. By tracking revenues and expenses, businesses can assess their financial performance and make informed decisions. These accounts provide valuable insights into the revenue-generating activities and cost management of an organization.

Another important attribute of nominal accounts is that they are closed at the end of the accounting period. This means that their balances are transferred to the retained earnings or income statement, which helps in calculating the net income or net loss for the period. By closing nominal accounts, businesses can start the next accounting period with a clean slate.

In summary, nominal accounts are temporary accounts that record revenues, expenses, gains, and losses. They are reset to zero at the beginning of each accounting period and closed at the end of the period to determine the net income or net loss.

Real Accounts

Real accounts, also known as permanent accounts, are used to record assets, liabilities, and owner's equity. These accounts are not closed at the end of the accounting period and their balances are carried forward to the next period. Real accounts provide a continuous record of a company's financial position.

One key attribute of real accounts is that they have a cumulative effect on a company's financial position. The balances of real accounts are carried forward from one accounting period to another, allowing for the calculation of the company's total assets, liabilities, and owner's equity. Examples of real accounts include cash, accounts receivable, accounts payable, inventory, and retained earnings.

Real accounts are essential for maintaining accurate financial records and preparing financial statements. By recording assets, liabilities, and owner's equity, businesses can assess their financial health and make informed decisions. These accounts provide a comprehensive view of a company's financial position and help in evaluating its solvency and liquidity.

Another important attribute of real accounts is that they are not closed at the end of the accounting period. Unlike nominal accounts, real accounts do not reset to zero. This allows for the accumulation of financial data over time, providing a historical perspective on a company's financial performance.

In summary, real accounts are permanent accounts that record assets, liabilities, and owner's equity. They have a cumulative effect on a company's financial position and are not closed at the end of the accounting period.

Conclusion

In conclusion, nominal accounts and real accounts are two distinct types of accounts used in accounting. Nominal accounts are temporary accounts that record revenues, expenses, gains, and losses. They are reset to zero at the beginning of each accounting period and closed at the end of the period. On the other hand, real accounts are permanent accounts that record assets, liabilities, and owner's equity. They have a cumulative effect on a company's financial position and are not closed at the end of the accounting period.

Both types of accounts play a crucial role in maintaining accurate financial records and assessing the financial health of a business. Nominal accounts help in determining the profitability of a company, while real accounts provide a comprehensive view of its financial position. By understanding the attributes of nominal accounts and real accounts, businesses can effectively manage their finances and make informed decisions.