Define Nominal Accounts

Nominal accounts are temporary accounts used in the accounting process. They are accounts used to track amounts for a period; and when the period is over, these accounts return to a zero balance. Accounting is made up of different types of accounts, and accounts are used to keep track of a company's financial transactions.

Temporary

Nominal accounts, also referred to as temporary accounts, are used by a business to track specific amounts spent or earned within different categories. These accounts begin each fiscal year with a zero balance, and throughout the year, amounts are placed into the accounts. The accounts continue to increase all year, and finally at the end of the year they are brought back down to zero.

Revenue Accounts

Revenue accounts are one classification of nominal accounts. Businesses have revenue accounts on their books which track all sales the company made throughout the year. Revenue accounts have normal credit balances, and each time a sale is made, the account is credited. The credits continue rolling in all year, and finally at the end of the year, the company sees exactly the amount of sales made in that time frame.

Expense Accounts

Expense accounts are also a classification of nominal accounts. Companies track all expenses by placing the amounts spent into different accounts. Each different type of expense has its own account, and expense accounts always have normal debit balances. When an expense occurs, it is posted as a debit to that particular expense account. At the end of the year, the company looks at the expenses to see exactly how much was spent in each category. These accounts also begin each year with a zero balance, and amounts accumulate in them throughout the period.

Income Statement

The income statement is a report generated by a business that documents the company's net profit or loss for a period. The income statement is made up of all nominal accounts and reflects the company's income, or revenue, minus the company's expenses. Since the income statement is a report that tracks information for a period, only nominal accounts are included in it.

Closing Process

At the end of each year, companies go through a closing process where financial records are closed so the firms can begin a new year. The closing process consists of several steps, but one of the most important concepts is closing the nominal accounts. When the nominal accounts are closed out, this means they are all brought back down to zero. Revenue accounts are debited for the balances they contain, and expense accounts are credited for their balances. When this happens, all nominal accounts have zero balances, and they are ready to begin accumulating amounts in them for the next year.

References

• Accounting Coach: What is a Nominal Account?
• Principles of Accounting: The Reporting Cycle

Resources

• Read this Article in Spanish