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, temporary (nominal) accounts are those that are used to record transactions for a specific accounting period and are closed at the end of that period. These accounts are reset to zero at the beginning of the next period, and their balances are transferred to permanent (real) accounts, typically the retained earnings account.
Salary Expense is a temporary account because it is used to track the salary expenses for a specific accounting period, usually a month or a year. At the end of the period, the balance in the salary expense account is transferred to the retained earnings account (a permanent account) through the process of closing the books.
Now let’s look at the other options:
- a. Unearned Revenue: This is a liability account that tracks revenue received in advance for goods or services to be provided in the future. It is a permanent account because its balance carries over from one period to the next until the revenue is earned and recognized.
- c. Inventory: This is an asset account that tracks the value of goods that a company holds for sale or use in its operations. Inventory is also a permanent account because its balance is carried forward from period to period as part of the company’s financial position.
- d. Retained Earnings: This is an equity account that represents the cumulative net income of a company, minus any dividends paid to shareholders. It is a permanent account, as its balance carries over from one period to the next and is adjusted by the net income or loss each period.
Thus, the key difference is that salary expense (option b) is a nominal account because it resets each period, whereas the other accounts are permanent accounts.