Real vs Nominal Accounts: Difference and Comparison

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 on their needs.

Real and Nominal Accounts have different approaches to maintaining the accounts and will be preferred basis on the type of work the company needs. 

Key Takeaways

1. Real accounts are assets, liabilities, and equity, while nominal accounts relate to income, expenses, gains, and losses.
2. Real accounts are permanent and continue across accounting periods, while nominal accounts are temporary and closed at the end of each accounting period.
3. Real accounts follow the golden rule of accounting for assets and liabilities, while nominal accounts follow the golden rule for revenues and expenses.

Real vs Nominal Accounts

Real accounts are used to record assets, liabilities, and equity; they are permanent accounts that carry over from one accounting period to the next. Nominal accounts are temporary accounts that are closed out at the end of each accounting period and are used to record gains and losses.

Real accounts are 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 the option to transfer it into a real account if we wish. The final amount will determine either the profit or loss statement.

Comparison Table

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 examples of Real Accounts are maintaining assets, liability accounts, and 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 at the end of the year. It will be maintained by the management.

The main process involved 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 decide 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 to 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 examples of nominal accounts are the company’s income statement and the drawing account of the owners.

The income statement is used to maintain the report of the company’s income, expenses, and losses. Some businesses might be in 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

1. The real account begins and will be carried forward with whatever balance it has. In contrast, the nominal account will be closed at the end of the year.
2. 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. 
3. The real account’s main purpose is to find the company’s financial statement, while the nominal account’s main purpose is to find the profits and losses of the company.
4. Real Accounts are long-term when it comes to maintaining the accounts. In contrast, Nominal Accounts are called short-term because they will be closed faster.
5. They will be treated differently, and it depends upon the kind of business organization they work with. 

References

1. https://www.sciencedirect.com/science/article/pii/S026156069600054X