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 are also referred to as temporary accounts because they are used to track transactions for a specific period and are reset at the end of the accounting period. They include income, expenses, gains, and losses. The balance in nominal accounts is not carried forward to the next period but is closed at the end of the accounting period, with the balances being transferred to permanent accounts (typically the capital or equity accounts). This process is known as closing the books.
Key Characteristics of Nominal (Temporary) Accounts:
- Purpose: Nominal accounts are designed to record transactions that occur over a specific accounting period. This allows businesses to measure the performance (profit or loss) for that period.
- Types of Nominal Accounts: These include accounts like:
- Revenue accounts: These record the income earned by a business, such as sales revenue or service revenue.
- Expense accounts: These record the costs incurred by a business, like rent, wages, and utilities.
- Gain or loss accounts: These account for any gains or losses from the disposal of assets or any other non-recurring events.
- Closing Process: At the end of an accounting period, the balances of nominal accounts are transferred to the capital account (or retained earnings, in case of corporations) in a process known as the closing entries. This effectively “zeroes out” these accounts, ready for the next accounting period.
- Contrast with Permanent Accounts: Permanent accounts, also called real accounts, such as assets, liabilities, and equity, track the ongoing financial position of a business. Their balances are carried forward from one accounting period to the next. In contrast, nominal accounts do not carry their balances forward.
Thus, the fundamental aspect of nominal accounts is that they represent temporary financial elements that reflect the financial performance of a business within a specific period, after which they are reset for the next period.