The Differences between Real and Nominal Accounts

The Differences between Real and Nominal Accounts

An account is a systematic presentation of all transactions related to a specific account. It can be classified via assets, liabilities, and several other things.

Real Accounts

Real accounts are related to assets or properties. According to Tracy 2015, real accounts are those reported in the balance sheet, which summarizes the assets, liabilities, and owners’ equity of a business.

Because they are not closed at the end of an accounting year, they are also known as permanent accounts. Their balances are carried forward to the next accounting period.

What are examples of real accounts?

They are classified into tangible and intangible real accounts:

• Tangible real accounts: These include assets that can be touched—for example, Cash, Inventory, Accounts Payable, Accounts Receivable, Land, and Building.
• Intangible real accounts: These are assets that cannot be touched; they have no physical existence—for example, Patents, Trademarks, Copyrights, and Goodwill.

Rules of real accounts: Debit what comes in, credit what goes out.

Example of real accounts rules in effect

Nominal Accounts

Nominal accounts are reported in the income statement, which summarizes revenue and expenses for a period (Tracy 2015). They are related to income, gains, losses, and expenses. Examples of nominal accounts include Purchase, Sales, Commission Received, Salaries, and Wages.

The nominal account is closed at the end of the accounting year, also known as the temporal account. It does not carry forward its balances to the next accounting year.

A nominal account outcome is either profit or loss, which is finally transferred to the capital account. At the start of every accounting year, nominal accounts start with a zero balance. Then, they accumulate all gains and losses and return the balance to zero by transferring the account balance to a permanent account.

Rules of a nominal account: Debit all the expenses and losses of the business and credit all the income and gains of the business

Example of nominal account rules in effect:

References

Tracy, John A. (2015). Distinguishing Real and Nominal Business Accounts. Accounting Workbook for Dummies. Retrieved 28 November 2020 (URL)

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