Key Difference – Nominal Account vs Real Account
The financial year end statement preparation requires recording of numerous transactions in various accounts throughout the period. There are different account types such as assets, liabilities, equity, incomes, expenses, gains and losses. The balances in incomes, expenses, gains and losses accounts are closed at the end of the accounting year and these are referred to as nominal accounts. On the other hand, balances in accounts of assets, liabilities and equity are not closed at the end of the accounting year, instead, they are carried forward for the next year. Such accounts are referred to as real accounts. This is the key difference between nominal account and real account.
CONTENTS
1. Overview and Key Difference
2. What is Nominal Account
3. What is Real Account
4. Side by Side Comparison – Nominal vs Real Account
5. Summary
What is a Nominal Account?
The balance in a nominal account is closed at the end of the accounting year. As a result, a nominal account begins each accounting year with a zero balance. Since the balance does not carry forward to the next accounting year, a nominal account is also referred to as a ‘temporary account’.
Most of the nominal account balances are recorded in the income statement. Balances recorded on an income statement are related to accounts that have completed a business transaction, thus, there is no balance to carry forward. The final amount in the income statement, the net profit will be transferred to the equity section in the balance sheet.
What is a Real Account?
The balance in a real account is not closed at the end of the accounting year. Instead, a real account begins each accounting year with its balance from the end of the previous year. Because accounting year end balance is carried forward to the next accounting year, a real account is also known as a ‘permanent account’. For instance, assets such as land and buildings continue to exist irrespective of the changes in accounting years. The existence of a real account will be there until the end of the business.
What is the difference between Nominal Account and Real Account?
Nominal Account vs Real Account |
|
| Balance in a nominal account is closed at the end of the financial year. | Balance in a real account is not closed at the end of the financial year. |
| Account Type | |
| Incomes, expenses, gains and losses accounts are classified as nominal accounts. | Accounts of assets, liabilities and equity are classified as real accounts |
| Financial Statement | |
| Nominal account balances are recorded in the income statement. | Real account balances are recorded on the balance sheet. |
Summary – Nominal Account vs Real Account
The difference between nominal account and real account is mostly related to the type of accounts. Nominal Accounts are short-term accounts that last for an accounting year while real accounts continue to exist in the following financial years as well. The treatment for each account type is dependent on the accounting principles, the nature of the transactions recorded and the impact they have to the organization. Understanding the difference between nominal account and real account assists better understanding of the nature and impact of different accounts types.
Reference:
1.”What is the difference between a nominal account and a real account? | AccountingCoach.” AccountingCoach.com. N.p., n.d. Web. 03 Mar. 2017.
2.”Real Accounts vs. Nominal Accounts: Definition, Differences & Examples.” Study.com. Study.com, n.d. Web. 03 Mar. 2017.
3. “What is nominal account? definition and meaning.” BusinessDictionary.com. N.p., n.d. Web. 03 Mar. 2017.
4. “What is a real account? | AccountingCoach.” AccountingCoach.com. N.p., n.d. Web. 03 Mar. 2017.