Nominal accounts are also called
a. temporary accounts.
b. permanent accounts.
c. real accounts.
d. none of these.
The correct answer and explanation is :
The correct answer is:
a. temporary accounts.
Explanation:
Nominal accounts, also referred to as temporary accounts, are accounts that track a business’s financial transactions over a specific accounting period, such as a fiscal year. These accounts include revenue, expense, gain, and loss accounts. The reason they are called “temporary” is because their balances are closed or zeroed out at the end of each accounting period, and the balance is transferred to permanent accounts, specifically the retained earnings account, which is a part of equity.
Key characteristics of nominal accounts (temporary accounts):
- Revenue Accounts: These accounts track the money a business earns from its operations. Examples include sales revenue, service income, interest income, etc.
- Expense Accounts: These accounts track the costs incurred by a business in generating revenue. Examples include salaries, rent, utilities, depreciation, and other operating expenses.
- Closing Process: At the end of an accounting period, all the balances in nominal accounts are transferred to permanent accounts. This process is known as the closing of accounts. The closing entries help reset the balances of nominal accounts to zero, so they can start fresh in the new period. The closing entries also help update the retained earnings account with the net income (or loss) for the period.
- Temporary Nature: Unlike permanent accounts (real accounts), which have their balances carried over into the next period, nominal accounts only reflect the financial performance of a specific period and are not meant to carry balances from one period to another.
Contrast with Permanent Accounts (Real Accounts):
Permanent accounts (real accounts) include assets, liabilities, and equity accounts. These accounts carry their balances forward into the next accounting period. Examples include cash, accounts payable, accounts receivable, and owner’s equity. Unlike nominal accounts, permanent accounts do not get closed or reset at the end of the period.
In summary, nominal accounts are essential for tracking a company’s financial performance during a specific period, and they are called temporary accounts because their balances are transferred to permanent accounts once the period ends.