Nominal Accounts or Temporary Accounts meaning and explanation

Types of Account ( Nominal Account )

• Personal Accounts
• Real Accounts
• Nominal Accounts

Nominal Accounts

Nominal Accounts:    Accounts relating to income, revenue, gain expenses and losses are termed as nominal accounts. These accounts are also known as fictitious accounts as they do not represent any tangible asset. A separate account is maintained for each head or expense or loss and gain or income. Wages account, Rent account Commission account, Interest received account are some examples of nominal account.

Nominal Accounts also known as Temporary accounts. Temporary accounts whose balances are not carried over from one accounting period to another, but are closed, or transferred, to permanent accounts at the end of an accounting period. Revenue and expense accounts, along with income distribution accounts (such as dividend) are temporary accounts. The balances in all temporary accounts are transferred to the capital or the retained earnings account, leaving the temporary accounts with zero balances. This procedure, called closing, is necessary to determine a periodic net income (or loss) and prepare books for the next period. The purpose of temporary accounts is to show how any revenues, expenses, or withdrawals (which are usually called draws) have affected the owner’s equity accounts.