Real and Nominal Accounts

Definition

The financial accounting terms real and nominal refer to permanent accounts that appear on the balance sheet (real) as well as temporary accounts that appear on the income statement (nominal).

Explanation

An account is used to record the effects of events and transactions on a company's financial statements.  Events can be both internal and external and will involve a change in assets, liabilities, and owner's equity; while a transaction is a specific type of external event that involves the exchange of value between two entities.

Accounts are maintained for assets, liabilities, owner's equity, revenues and expenses.  Generally, they are divided into two subcategories:

  • Real:  these are considered permanent accounts, and are used to record changes to balance sheet line items such as assets, liabilities, and owner's equity.  Real accounts are never closed.
  • Nominal:  these are considered temporary accounts, and are used to record changes to income statement line items such as revenues and expenses.  Nominal accounts are periodically closed as part of the accounting cycle.

Related Terms

events and transactions, income statement, balance sheet, accounting cycle, double-entry accounting, journalization