Real vs Nominal Accounts: Key Differences & Examples (2026)

A nominal account tracks income and expenses for a single fiscal period, then resets to zero. A real account, covering assets, liabilities, and equity, carries its balance forward indefinitely. Getting these two mixed up leads to misclassified entries, wrong tax filings, and messy financial statements. For Philippine businesses filing with the BIR, that kind of error gets expensive fast.

Here’s a breakdown of the key differences between these two account types, how they show up in your financial statements, and when each one matters.

What is a Nominal Account?

A nominal account, sometimes called a temporary account, records transactions for one fiscal year. At year-end, its balance resets to zero, so you start the next period fresh. Nominal accounts primarily include income statement accounts such as revenues and expenses. Additionally, the income summary and dividends accounts, if utilized during the closing process, also count as temporary accounts.

What is a Real Account?

Real accounts, also known as permanent accounts, remain part of a company’s books indefinitely. Their balances carry forward at the end of each accounting period. Examples of real accounts are balance sheet accounts like assets, liabilities, and stockholders’ equity.

To move a balance from a nominal account to a real one, you make a closing journal entry. For an expense account (which carries a debit balance), you credit the expense account and debit the permanent account that receives the funds. Conversely, for a revenue account with a credit balance, you debit the revenue account and crediting the corresponding permanent account.

Example:
Expense ₱10,000 → Dr. Income Summary ₱10,000 | Cr. Salaries Expense ₱10,000
Then closed to Retained Earnings:
Dr. Retained Earnings ₱10,000 | Cr. Income Summary ₱10,000

Difference between Nominal Accounts and Real Accounts

“Nominal Accounts” and “Real Accounts” are terms used in accounting to classify different types of accounts in a business’s records. They come from the double-entry bookkeeping system and organize transactions into two main groups:

Simple example:
A retail store in Quezon City, in January:

• Sales Revenue ₱150,000 = nominal account because it records income for the current period and will be reset at year-end.
• Cash ₱150,000 = real account because it remains on the balance sheet and carries forward to the next period.

In traditional double-entry bookkeeping, accountants also recognize personal accounts, which relate to individuals, businesses, or organizations such as customers, suppliers, and owners. Personal accounts track who the business gives value to or receives value from. For example, Accounts Receivable – Juan Store or Accounts Payable – ABC Supplier identifies a specific party, while Cash or Inventory represents the asset itself.

This classification is especially relevant for businesses using BIR-registered computerized systems, where account types must be properly mapped.

Functions of Nominal Accounts and Real Accounts

Temporary accounts provide a detailed view of income and expenses, but manual methods require extra accuracy to avoid errors. Accounting software can greatly streamline the process, ensuring faster and more accurate financial reporting.

Permanent accounts directly affect in showing the company’s financial health and supporting informed decision-making, such as investment or loan approvals. Understanding the cut-off date is also needed for distinguishing between nominal and real accounts.

Examples of Nominal Accounts

Nominal accounts or temporary accounts purpose is to track income, costs, and other period-based transactions within one accounting period. The company closes these balances and resets them to zero for the next cycle at every end of period.

Common examples include Sales Revenue, Cost of Goods Sold, rent expense, salaries expense, interest income, and interest expense. For instance, if a retail shop in Manila records ₱180,000 in sales and ₱95,000 in cost of goods sold in April, both accounts are nominal because they only measure that month’s performance.

Most nominal accounts fall under revenue and expenses. However, temporary accounts can also include items such as dividends or owner withdrawals, because the business also clears them at period-end rather than carrying them forward like balance sheet accounts.

1. Expenses

Expenses are the costs a business incurs to operate and earn revenue. These accounts appear in the income statement for the current period only.

• Operational expenses: These are routine costs directly connected to running the business, such as rent, salaries, supplies, insurance, and advertising. For example, if a Quezon City trading business pays ₱25,000 in rent, ₱40,000 in salaries, and ₱8,000 in advertising for the month, each amount is recorded in a separate nominal expense account. Some of these may also qualify as deductible items when you file with the BIR. Which business expenses qualify as tax deductions in the Philippines
• Non-operational expenses: These are costs that do not come from the company’s main operations, such as interest expense or bad debt losses. For example, if the same business pays ₱3,500 in loan interest and writes off ₱6,000 from an uncollectible customer balance, both are recorded as non-operational expenses.

2. Revenue

Revenue is the income a business earns during a specific accounting period. Like expenses, revenue accounts are temporary and are closed at period-end.

• Operational revenue: This is income earned from the company’s main business activity. For example, if a wholesaler sells goods worth ₱220,000 in one month, that amount is recorded as sales revenue. If a logistics company earns ₱75,000 from delivery services, that is also operational revenue.
• Non-operational revenue: This is income from activities outside the company’s core operations and may not occur regularly. For example, a business may receive ₱2,500 in bank interest or ₱10,000 in commission income from a side arrangement. These amounts are recorded separately so the business can clearly distinguish regular operating income from incidental income.

Examples of Real Accounts

Real accounts are permanent accounts that stay in the books from one period to the next. They usually appear in the statement of financial position and fall into three main groups: assets, liabilities, and equity.

For example, if a small store in Makati has ₱120,000 in cash, ₱35,000 in trade receivables, and shelving worth ₱60,000, all of these are real accounts because their balances carry forward to the next month. They do not reset to zero at year-end like revenue or expense accounts.

1. Assets

Assets are resources the business owns or controls and can use to operate or generate value. Common examples include cash, bank balances, trade receivables, deposits, inventory, and fixed assets such as equipment or vehicles. If you manage receivables, tracking their aging helps you identify overdue balances before they affect cash flow.

2. Liabilities

Liabilities are amounts the business still owes to other parties. These may include trade payables, salary payables, taxes payable, rent payable, and bank loans. For instance, if the same store still owes a supplier ₱28,000 and has unpaid salaries of ₱12,000, both amounts are recorded as liabilities until the business settles them.

3. Equity

Equity is the owner’s residual interest in the business after subtracting liabilities from assets. It usually includes owner’s capital and retained earnings. For example, if a business has total assets of ₱215,000 and total liabilities of ₱40,000, its equity is ₱175,000. Because equity remains on the balance sheet and carries forward to the next period, it is also a real account.

Conclusion

Nominal accounts and real accounts serve different but equally important roles in your books. Nominal accounts, covering income and expenses, reset at the end of each fiscal period, giving you a clean view of performance per year. Real accounts, assets, liabilities, and equity carry their balances forward, reflecting your company’s financial position over time.

For Philippine businesses, correctly classifying these accounts isn’t optional. The BIR expects your income statements and balance sheets to be accurate, and misclassification can trigger audit findings or penalties during tax filing season. Whether you handle it manually or through software, getting this right protects your business.

If you’re still managing your books on spreadsheets or manual journals, it may be worth considering an upgrade. You can check out our comparison of the best accounting software options in the Philippines to find a platform that fits your business size and compliance needs.

FAQ on Real and Nominal Accounts

• Can a single account be both real and nominal?

  No, an account is classified as either real or nominal based on its nature. Real accounts pertain to assets, liabilities, and equity, while nominal accounts relate to revenues, expenses, gains, and losses.

• How do real and nominal accounts impact financial statements differently?

  Real accounts appear on the balance sheet and reflect the company’s financial position at a point in time, carrying their balances forward. Nominal accounts are reported on the income statement, showing performance over a period, and are closed at period-end.

• Why is it important to distinguish between real and nominal accounts?

  Proper classification ensures accurate financial reporting, aids in applying the correct accounting rules, and helps in analyzing financial performance versus financial position.

• What is the process for closing nominal accounts?

  At the end of an accounting period, nominal account balances are transferred to the income summary account, which is then closed to retained earnings, resetting nominal accounts to zero for the next period.