Nominal Account
In accounting, a nominal account, also known as a temporary account, is an account that is closed at the end of each accounting period. These accounts include all income statement accounts (like revenues, expenses, gains, and losses), and in certain cases, also the owner’s drawing account.
Nominal accounts are used to record transactions related to the income, expenses, losses, and gains of a business. At the end of the accounting period, these accounts are closed out to the retained earnings account (or in the case of a sole proprietorship, to the owner’s capital account), and their balances are not carried into the next period. Instead, they start the new accounting period with a zero balance.
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For example, the “Sales Revenue” account is a nominal account. During an accounting period, all sales made by the business are recorded in this account. However, at the end of the accounting period, the balance in the Sales Revenue account is transferred to the retained earnings account, and the Sales Revenue account starts the next period with a zero balance.
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This is in contrast to real (or permanent) accounts, such as asset, liability, and equity accounts, which carry their ending balance into the next accounting period.
Example of a Nominal Account
Consider a business that has a “Utilities Expense” account. This is a nominal account because it tracks expenses associated with utilities like electricity, water, and heating for a particular accounting period (e.g., a month, quarter, or year).
Let’s say that in the month of June, the business incurs $1,000 in utilities expenses. These expenses are recorded as debits in the Utilities Expense account.
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Throughout June, every time the business pays a utility bill, the payment is recorded in this account. At the end of June, let’s assume the total utilities expenses for the month sum up to $1,000. This amount is then “closed out” to an equity account (often the Retained Earnings account in a corporation) to reflect the reduction in earnings due to these expenses.
The key is that, once closed out at the end of June, the Utilities Expense account will start with a zero balance at the beginning of July. All utility expenses in July will then be tracked separately from June’s expenses. This allows the business to clearly see the utilities expenses incurred in each accounting period, aiding in performance review and decision-making for future periods.
Remember, this is a simplified example. Actual accounting practices can be much more complex and might involve other steps and considerations. But at its core, this is how a nominal (or temporary) account functions.
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