What is Nominal Account and Real Account?

In the accounting cycle, accountants analyze and record the transaction in the accounting system to prepare the financial statements. During the recording, they need to select the accounts for debit and credit, some system may use different model but they still follow the same concept. The transactions will record into general ledger and at the month-end, the balance in each account will end up on the trial balance. All the accounts in trial balance will form the financial statements which include income statement, balance sheet, change in equity and cash flow.

All the accounts must fall into five categories of financial statement which is an asset, liability, equity, revenue, and expense.

Nominal Accounts

Nominal accounts , also known as temporary accounts, are the accounts that will close at the end of accounting period. Their balance will not carry to the next period. They will start from zero in the next period. These accounts are part of the income statement which include revenues and expenses. As at the year-end, accounting system will use all income and expenses accounts to build the income statement and calculate profit or loss during the period. And the profit or loss will be transfer to the Retained Earning account in the balance sheet. As at the beginning of a new period, all incomes and expenses account will start with zero balance.

Nominal Accounts include:

• Revenue
• Expenses: Payroll, Rental, Marketing Expense…
• Gain loss on the exchange rate
• Gain loss on asset disposal

Real Accounts

Real accounts, also known as permanent accounts, are the accounts that will carry forward to the next accounting period. These accounts keep carrying forward until the business close. They are part of the accounting equation (Asset = Liability + Equity) which we can find in the balance sheet.

Real accounts include:

• Asset: Cash on hand, cash at bank, accounts receivable, inventory, fixed assets, investment
• Liability: Accounts Payable, Noted payable, Debt
• Equity: Share Capital, Retain Earning and another reserve

Some of these accounts may go to zero at some points but not all of them, these accounts need to ensure the balance of accounting equation. For example, we may run out of cash, so the cash balance will be zero but the entire asset will never go to zero.

Difference between nominal accounts and real accounts

Nominal Account	Real Account
Balance will reset at the end of the year. The account will start as zero at the beginning of accounting period.	The balance will be brought forward from one period to another.
All nominal accounts are included in the income statement.	All real accounts are include in the balance sheet.