Maintaining accounts for an organization is very important. There are many methods out there to maintain accounts. Different companies will opt for different methods depending upon their needs.
Real and Nominal Accounts have different approaches in maintaining the accounts and will be preferred basis on the type of work the company needs.
Real vs Nominal Accounts
The difference between Real and Nominal Accounts is that in a real account, the account will start with the ending balance for the upcoming year. While in a Nominal account, the account will start with a zero balance for the upcoming year. The real account will be maintained till we close it. But the Nominal account will be maintained only for a year.
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Real accounts used to follow a rule. It uses this technique called the debit that comes in the process and the credit that goes out after the process.
The real account will be active for an entire year and will be continued further till we take the step to close it. They will be taken forward since we don’t intend to close it.
In a Nominal account, the statements and the transactions written are within that particular year. This is the same reason for its name called temporary account.
But we have an option to transfer it into a real account if we wish. The final amount will determine either the profit or loss statement.
|Parameters of Comparison||Real Accounts||Nominal Accounts|
|Definition||Accounts will be recorded regularly and will be maintained on the balance sheet.||Accounts will be recorded in an income statement and will be closed at the end.|
|Advantages||It gives the information the moment you need.||It allows you to start the next year with zero balance.|
|Disadvantages||The interest rates will be low.||It is temporary, so you cannot access it once you close.|
|Also Called as||Permanent Account||Temporary Account|
|Example||Bank Account||Rent Account|
What are Real Accounts?
A Real Account means we can’t close it at the end of the year like how we close other accounts. This will be processed till we use another account. In simple words, we can call it a Permanent Account as well.
Because unless we decide to close that account, it will be carried forward. Real Account’s main work is processed on balance sheets. This could be either excel or google sheets.
Some of the examples of Real Accounts are maintaining assets, maintaining liability accounts, maintaining stockholders’ accounts. In this account, we can find the current transactions and the transactions that are going on in the company.
They are maintained in the form of balance sheets and will be checked mainly at the end of the year. It will be maintained by the management.
The main process involves here is the balance at the end of the year will be calculated. This is the balance that is derived from the process of what we had in the initial balance that is the beginning of the account which will be one year back.
Now, after one year, the same balance will be again calculated as an initial balance for the upcoming year. This process will be continued till we decided to close the account. That is the main reason for its name permanent account.
What are Nominal Accounts?
A Nominal Account is used to take care of all the income, losses, and expenses in that business. One of the best examples of a nominal account is opening an interesting account.
As the name itself, we can relate it with the definition of the nominal account. In a nominal account, the debit is used for the loss of business. And the credit is used for the income of the business. These are also called temporary accounts.
In this account, the next accounting process for every year will start with a zero balance. Some of the examples of nominal accounts are the company’s income statement and the drawing account of the owners.
The income statement is mainly used to maintain the report of the company’s income, expenses, and losses. Some businesses might be in the sole proprietorship. In that case, the amount will be transferred to the capital account of the owner.
Sometimes the business might be in the corporate sector. In that case, the amount will be transferred to the earnings account.
At the end of the year that is fiscal, we can transfer the account into a permanent account. The Golden rule which is applied to this depends on the debit or the loss that happens.
Salary may or may not come under the nominal account. If we don’t pay the salary, then it doesn’t come under the nominal account.
Main Differences Between Real and Nominal Accounts
- The real account begins and will be carried forward with whatever balance it has. While the nominal account will be closed at the end of the year.
- The real account transactions and other statements are maintained in a balance sheet, while the nominal account statements are noted in the business income sheet.
- The real account’s main purpose is to find the financial statement of the company, while the nominal account’s main purpose is to find the profits and losses of the company.
- Real Accounts are long-term when it comes to maintaining the accounts. While, Nominal Accounts are called short-term because they will be closed faster.
- They will be treated differently, and it depends upon the kind of business organization they work with.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.