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What is a nominal account in accounting?

Accounting & finance for BankingBasics

JAIIB Exam Study Material: What is a nominal account in accounting?

Definintion of Nominal Account

In accounting, nominal accounts are the general ledger accounts that are closed at the end of each accounting year.
The closing process transfers their end-of-year balances from the nominal accounts to a permanent or real general ledger account. As a result, the nominal accounts are also referred to as temporary accounts. The closing process also means that each nominal account will start the next accounting year with a zero balance.
Examples of Nominal Accounts

The nominal accounts include:

All of a company's income statement accounts, and
The owner's drawing account

The income statement accounts record and report the company's revenues, expenses, gains, and losses. When the company is a sole proprietorship, the balances in these accounts will be closed by transferring the net amount into the owner's capital account. If the business is a corporation, the balances will be transferred to the retained earnings account.

Since the owner's drawing account is not an income statement account, its balance will be closed by transferring its debit balance directly into the owner's capital account.

Income Statement: Retail/Whsle - Corporation, Multiple-Step

Income Statement: Retail/Whsle - Sole Proprietor, Multiple-Step

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