Which of the following is a nominal (temporary) account?
a. Unearned Revenue
b. Salary Expense
c. Inventory
d. Retained Earnings
The correct answer and explanation is :
The correct answer is b. Salary Expense.
Explanation:
In accounting, accounts are classified into two major types: permanent and temporary (nominal) accounts.
- Permanent accounts: These accounts are carried over from one accounting period to the next. They include:
- Assets
- Liabilities
- Equity accounts like Retained Earnings These accounts are called permanent because their balances are cumulative and continue to exist throughout multiple periods.
- Temporary (Nominal) accounts: These accounts track transactions for a specific period and are closed at the end of each accounting cycle (typically at the end of a fiscal year). The balances in these accounts are reset to zero at the beginning of the next period. Temporary accounts include:
- Revenues
- Expenses
- Gains
- Losses At the end of an accounting period, temporary accounts are closed to Retained Earnings (a permanent account) in the closing process.
Analysis of the given options:
- a. Unearned Revenue: This is a liability account, which is a permanent account. It represents money that has been received for goods or services not yet provided. Since it is a liability, it is not a temporary account.
- b. Salary Expense: This is a temporary account, specifically an expense account. Expenses, including salary expense, are nominal accounts, which track costs over a specific period. At the end of the period, salary expense (and other expenses) is closed to Retained Earnings.
- c. Inventory: Inventory is an asset account, which is a permanent account. Assets, including inventory, are not reset at the end of the period and are carried over.
- d. Retained Earnings: This is a permanent equity account that tracks the accumulated earnings of the business. It does not close at the end of the period and carries over to the next.
Thus, Salary Expense is the correct answer because it is a temporary account that is closed at the end of the period.