Nominal account

Nominal account
See also

A nominal account in the view of Rice A. is each of the items that make up the balance sheet (each of the boxes on the balance sheet chart) [1]. According to D. Khatri "Accounts of all expenses, losses, revenue and profit are collectively grouped as nominal accounts. A separate account is prepared for each item. The reason for maintaining separate account for each item is to have a detailed view about different type of expenses, which can further be used for carrying out an analysis with the aim to exercise control" [2].

As stated in Managerial Economics and Financial Accounting nominal accounts are opened to explain the nature of the transactions. "They do not really exist. For example, salary paid to the manager, rent paid to landlord, commissions paid to salesman, etc. cash goes out of the business and it is something real, while salary, rent or commission as such do not exist" [3]. All the ledger accounts are balanced and included in the trial balance. Nominal accounts will appear there provided they have some balance: a debit balance or a credit balance [4].

Differences between real and nominal accounts

Nominal accounts are accounts of the revenue and expenses of a business for a period of time while real accounts are accounts that include the balances of assets, liabilities and owners' equities of a business at a precise moment in time. Real accounts are active from the first to the last day of business. The balance in this account is the net amount after subtracting decreases from increases [5]. Nominal accounts are closed at the end of a year. After accumulating amounts of sales and expenses for the year their balances are closed. They are reset to zero to start the next year [6].

Nominal accounts and their characters

Expenses and losses (debit balances) [7]:

  • Dock dues
  • Carriage inward
  • Import duty
  • Freight
  • Motive power
  • Wages factory expenses
  • Rent
  • Salaries
  • Advertisement
  • Carriage outward
  • Audit fees
  • Bad debts
  • Bank charges
  • Discount allowed
  • Depreciation
  • Loss of sale of assets

Income and profits (credit balances):

  • Sales
  • Interest received from a bank
  • Discount received
  • Rent received
  • Rebates received
  • Bad debts recovered
  • Dividend recovered
  • Interest on investment
  • Commission received

References

Footnotes

  1. A. Rice 2015
  2. D. Khatri 2015
  3. M. K. Reddy, S. Saraswathi 2007, p. 304
  4. M. K. Reddy, S. Saraswathi 2007, p.343
  5. J. A. Tracy, 2006 p. 50
  6. J. A. Tracy, 2006 p. 51
  7. B. K. Banerjee 2008 p. 37

Author: Gabriela Wojtaszek