What is a Nominal Account?

A nominal account is an account in which accounting transactions are stored for one fiscal year. At the end of the fiscal year, the balances in these accounts are transferred into permanent accounts. Doing so resets the balances in the nominal accounts to zero, and prepares them to accept a new set of transactions in the next fiscal year. Nominal accounts are used to collect accounting transaction information for revenue, expense, gain, and loss transactions, all of which appear in the income statement.

A nominal account is also known as a temporary account.

What is a Real Account?

A real account is an account that retains and rolls forward its ending balance at the end of the year. These amounts then become the beginning balances in the next period. The areas in the balance sheet in which real accounts are found are assets, liabilities, and equity. Real accounts also include contra asset, contra liability, and contra equity accounts, since these accounts retain their balances beyond the current fiscal year.

A real account is also known as a permanent account.

Comparing Nominal Accounts and Real Accounts

There are several differences between nominal accounts and real accounts, which are as follows:

Balance at start of fiscal year. A nominal account starts the next fiscal year with a zero balance, while a real account starts with the ending balance from the prior period.
Financial statement impact. A nominal account affects the income statement, while a real account affects the balance sheet.
Duration. A nominal account only retains a balance for one fiscal year, while a real account retains a balance across multiple fiscal years.
Purpose. A nominal account measures business performance for a specific period, while a real account shows the financial position of a business as of a specific point in time.

Examples of Nominal Accounts and Real Accounts

Nominal accounts are typically associated with the income statement, and so are used to record revenues, expenses, gains, and losses. Examples of these accounts are product revenue, the cost of goods sold, compensation expense, and utilities expense. When these account balances are flushed out at year-end, their balances usually end up in the retained earnings account.

Real accounts are typically associated with the balance sheet, and so are used to record assets, liabilities, and equity. Examples of these accounts are accounts receivable, accounts payable, and additional paid-in capital.