Rebekiah has taught college accounting and has a master's in both management and business.
In accounting, there is a classification for everything. Transactions, financial statements, and accounts are broken down into classifications. In this lesson, we will be discussing two classifications of accounts - real accounts and nominal accounts.
Do you remember studying science in school? I certainly do. One of the things that I remember most is doing classification on different objects. It amazed me that a human wasn't just a human. Broken down in a scientific way, a human's classification looks like this:
That's an awful lot of words to use to categorize just one person, isn't it? This multiple-level classification reminds me of accounts in accounting. You see, an account is not simply an account. An account can be further broken down into different classifications just like a human is. It may look something like this:
It doesn't matter what you call it, an account is still an account, just like a human is still a human. In this lesson, we're going to take a look at two of the ways that accounts can be classified: real or nominal.
A real account is an account that will always be a part of a company's books once opened. It's there from the very first business day to the very last business day. Most of the real accounts show up on a company's balance sheet. The balance sheet is the financial statement that lists all the accounts that a company has and their balances.
However, just because an account doesn't show up on the balance sheet doesn't mean that it's not a real account. If an account has a zero balance, it wouldn't need to be reported on the balance sheet. It's still a part of the chart of accounts, which is the official, informal list of all of a company's accounts, and available to be used if needed.
It's the real accounts that show the assets, liabilities and owner's equity in a company. I bet you'd like to have a few examples of real accounts, wouldn't you? I'd be glad to oblige. Cash, accounts receivable, accounts payable, notes payable and owner's equity are all real accounts that are found on the balance sheet.
A nominal account is an account that is used during an accounting period to summarize the cash coming into the company and being paid out of the company for that time period. Nominal accounts are reported on the income statement, which is the financial statement that tells how much money a company made or lost in a given time period. In a nutshell, nominal accounts are any revenue and expense accounts that a company has.
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At the end of each accounting period, nominal account balances are zeroed out so that these accounts can begin the next accounting period with a clean slate. The entire purpose of a nominal account is to track the revenue and expenses for a company so that the net profit or net loss for a specific period can be calculated. Examples of nominal accounts are service revenue, sales revenue, wages expense, utilities expense, supplies expense, and interest expense.
Now that you know what a real account is and what a nominal account is, what's the biggest difference between the two? The answer to that is relatively simple. It's timing.
The amount of time that balances accumulate in accounts helps people identify what is a real account and what is a nominal account. Real accounts have running balances, meaning that the balances in those accounts continually add up, while nominal accounts do not keep a running balance. Nominal account balances zero out at the end of each accounting period.
In accounting, accounts are classified by several different names. Two of those classifications are real and nominal.
Real accounts, like cash, accounts receivable, accounts payable, notes payable, and owner's equity, are accounts that, once opened, are always a part of the company. Real accounts show up on a company's balance sheet, which is the financial statement that lists all the accounts that a company has and their balances. The balances of real accounts accrue over the lifetime of the company.
A nominal account is an account that is used during an accounting period to summarize the cash coming into a company and being paid out of the company but for just that time period. Nominal accounts are listed on a company's income statement, which is the financial statement that tells how much money a company made or lost in a given time period. All revenue and expense accounts are nominal accounts.
The major difference between these two types of accounts is that the balances of nominal accounts zero out at the end of each accounting period and do not accrue like the balances of real accounts.
Watch this video and prepare to do the following:
Indicate the various classifications of an account
Compare and contrast real and nominal accounts
Distinguish between a balance sheet, a chart of accounts and an income statement
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