Detailed Definition§
What is a Nominal Account?§
A nominal account is a type of ledger account in financial accounting that records all transactions related to expenses, losses, incomes, or gains. These accounts do not represent a person or a tangible asset but instead represent various categories of revenue and expenditures. They are critical for determining the net profit or loss for a given accounting period, and their balances are typically transferred to the profit and loss account.
Examples of Nominal Accounts§
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Revenue Accounts:
- Sales Revenue
- Service Revenue
- Interest Income
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Expense Accounts:
- Rent Expense
- Salaries Expense
- Utility Expense
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Gain and Loss Accounts:
- Gain on Sale of Asset
- Loss on Sale of Asset
- Bad Debts Expense
Frequently Asked Questions (FAQs)§
1. Why are nominal accounts closed at the end of the accounting period?§
Answer: Nominal accounts are closed to ensure that revenue and expense accounts are zeroed out at the start of the new accounting period, which helps in accurately measuring the new period’s income or loss.
2. How are nominal accounts different from real accounts?§
Answer: Nominal accounts pertain to incomes, expenses, gains, and losses, while real accounts pertain to assets, liabilities, and equity, which continue across accounting periods.
3. Where are the balances of nominal accounts transferred?§
Answer: The balances of nominal accounts are transferred to the profit and loss account at the end of the fiscal year.
4. Can you give an example of how a nominal account is recorded?§
Answer: For example, when a company incurs a utility expense:
Debit Utility Expense Credit Cash or Accounts Payable
5. Why are nominal accounts zeroed out after closing entries are made?§
Answer: Zeroing out nominal accounts after closing entries are made helps in starting the new accounting period with no carry-forward amounts, ensuring the accurate calculation of the period’s earnings.
Related Terms with Definitions§
- Real Account: Ledger accounts that are carried over from one accounting period to another, representing assets, liabilities, and equity.
- Personal Account: Accounts that represent the transactions of persons or entities, including customers, vendors, and creditors.
- Nominal Ledger: A central repository in which all nominal accounts are maintained, including income and expense accounts.
Online References§
Suggested Books for Further Studies§
- “Financial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso - This comprehensive textbook covers the fundamentals of financial accounting, including detailed explanations of nominal accounts.
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield - This book provides advanced insights into accounting practices, with a section dedicated to various types of accounts.
Accounting Basics: “Nominal Account” Fundamentals Quiz§
Thank you for diving into the complex yet crucial realm of nominal accounts with us. Keep practicing and enhancing your financial knowledge!
