 |
| Corporate Practice bd |
What-is-nominal-account-and-real-account-With Examples
In accounting, nominal accounts and real accounts are two fundamental classifications used to categorize different types of accounts based on their nature and usage in financial transactions.
Nominal Account:
Definition:
Nominal accounts, also known as temporary accounts or income statement accounts, are used to record revenues, expenses, gains, and losses over a specific accounting period. These accounts are closed at the end of each accounting period by transferring their balances to the income statement (profit and loss statement) to determine the net profit or loss for the period.
Characteristics:
Temporary Nature:
Balances in nominal accounts are reset to zero at the end of each accounting period.
Revenue and Expense Accounts:
Nominal accounts capture all income and expense transactions incurred by the business.
Examples:
Revenue Accounts:
Sales Revenue
Service Revenue
Interest Income
Rental Income
Expense Accounts:
Salaries Expense
Rent Expense
Utilities Expense
Depreciation Expense
Advertising Expense
Gain and Loss Accounts:
Gain on Sale of Assets
Loss on Disposal of Assets
Real Account
Definition:
Real accounts, also known as permanent accounts or balance sheet accounts, are used to record assets, liabilities, and owner's equity of a business. These accounts maintain their balances from one accounting period to the next and are not closed at the end of each period.
Characteristics:
Permanent Nature:
Balances in real accounts are carried forward and accumulated over multiple accounting periods.
Balance Sheet Accounts:
Real accounts represent the financial position of the business at a specific point in time.
Examples:
Asset Accounts:
Cash
Accounts Receivable
Inventory
Property, Plant, and Equipment (PP&E)
Investments
Liability Accounts:
Accounts Payable
Notes Payable
Accrued Liabilities
Long-Term Debt
Owner's Equity Accounts:
Owner's Capital
Retained Earnings
Key Differences:
Nature:
Nominal Account: Records income, expenses, gains, and losses.
Real Account: Records assets, liabilities, and equity.
Closing Process:
Nominal Account: Closed at the end of each accounting period to determine net income or loss.
Real Account: Balances are carried forward and accumulated.
Purpose:
Nominal Account: Used to calculate profitability and performance over a period.
Real Account: Used to calculate the financial position and solvency of a business.
Example Transactions:
Nominal Account Example:
Revenue Recognition: Debit Accounts Receivable $1,000, Credit Sales Revenue $1,000.
Expense Recognition: Debit Rent Expense $500, Credit Cash $500.
Real Account Example:
Asset Purchase: Debit Equipment $10,000, Credit Cash $10,000.
Liability Incurrence: Debit Accounts Payable $5,000, Credit Purchase of Inventory $5,000.
Understanding the distinction between nominal and real accounts is essential for accurate financial reporting, as it ensures transactions are properly classified and recorded according to their nature and impact on the financial statements.