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.

Real and Nominal Accounts: Definition & Difference Explained 2025

The terms “nominal account” and “real account” are well-known in accounting. Financial transactions must be recorded based on accounting principles, so that each entry is categorized appropriately.

This approach ensures financial reports are organized and easy to understand by relevant parties. Pero kung mano-mano ang recording, nakakapagod at prone pa sa errors, na pwedeng makasama sa negosyo.

To address these challenges, this article will discuss the key differences between real and nominal accounts, their roles in financial reporting, and how businesses can leverage Accounting Software to automate processes.

Key Takeaways

Nominal accounts are temporary and reset each fiscal year, recording income and expenses for a specific period.
Real accounts are permanent, carrying balances forward and reflecting assets, liabilities, and equity over time.
Understanding the difference helps businesses track financial performance, manage assets, and prepare accurate reports.
HashMicro’s Accounting Software automates account categorization and ensures error-free, BIR-compliant financial reporting.

Table of Contents

What is a Nominal Account?

A nominal account, often referred to as a temporary account, records transaction data for a specific accounting period, typically one fiscal year. These accounts are considered temporary because their balances are reset to zero at the end of the fiscal year, preparing them for the next period.

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, are also classified 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 transfer funds from a nominal account to a real account, the balance is cleared through a journal entry. For an expense account with a debit balance, the balance is zeroed by crediting the expense account and debiting the permanent account receiving the funds.

Conversely, for a revenue account with a credit balance, the transfer involves debiting the revenue account and crediting the corresponding permanent account.

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:

Aspect	Nominal Accounts	Real Accounts
Definition	Temporary accounts that record income, expenses, gains, and losses for a specific period.	Permanent accounts that represent assets, liabilities, and equity on an ongoing basis.
Account Types	Includes revenue, expense, gain, loss, and drawing accounts.	Includes cash, accounts receivable, inventory, accounts payable, and capital/equity.
Balance Treatment	Closed and reset to zero at the end of each accounting period.	Balances carry forward to the next period and accumulate over time.
Financial Statement Link	Mainly appear on the income statement and affect profit or loss.	Appear on the balance sheet and show the financial position of the business.
Main Focus	Track performance (income and expenses) for a set time period.	Show ongoing value of assets, debts, and owners’ equity.

Functions of Nominal Accounts and Real Accounts

To understand how different account types function in financial reporting, it’s important to distinguish between temporary (nominal) accounts and permanent (real) accounts. The table below breaks down their key functions and roles to help you see how each contributes to accurate and reliable accounting records.

Aspect	Temporary Accounts (Nominal)	Permanent Accounts (Real)
Main Functions	Facilitate accurate categorization of transactions for reliable reports. Support the matching concept (revenue, COGS, expenses). Simplify preparation of retained earnings or loss reports. Enable faster reporting through accounting system automation. Optimize cash flow reporting with CRM-Sales integration.	Reflect continuous financial condition across accounting periods. Act as audit checkpoints for compliance and verification. Provide insights into growth potential and net worth for stakeholders.
Key Notes	Temporary accounts offer detailed tracking of income and expenses but require high accuracy when done manually. Accounting software helps streamline and speed up reporting.	Permanent accounts provide long-term visibility of assets, liabilities, and equity, supporting strategic financial decisions.

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.

Functions of Permanent Accounts (Real)

Reflect the company’s financial condition by maintaining continuous balances across periods, indicating ongoing operations.
Serve as key observation points during internal and external audits to ensure compliance with reporting standards.
Offer insights into the company’s growth potential and net worth for stakeholders, shareholders, and investors.

Permanent accounts play a crucial role 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 essential for distinguishing between nominal and real accounts.

Examples of Nominal Accounts

Temporary accounts primarily include sales, cost of goods sold, and expenses found in the income statement. They also cover dividends and withdrawals in the statement of changes in equity, as well as prepaid expenses.

In general, temporary accounts consist of two main categories: expenses and revenue.

1. Expenses

Expenses are costs incurred by a company for its business activities. They can be divided into two subcategories:

Operational expenses: Costs required to generate revenue, such as supplies, rent, salaries, insurance, and advertising expenses.
Non-operational expenses: Costs not directly related to the company’s core operations, such as interest expenses and bad debt losses.

2. Revenue

Revenue refers to the increase in assets resulting from business and operational activities. Revenue can also be divided into two types:

Operational revenue: Income generated from the company’s core sales or activities, such as sales revenue for trading businesses and transportation fees for logistics companies.
Non-operational revenue: Income from outside the company’s core operations, often irregular, such as commission income or interest income.

Accounting software offers a solution for businesses to easily categorize nominal accounts. This allows companies to accurately identify revenue and expenses for a specific period, making calculations simpler and ensuring accurate results.

Examples of Real Accounts

Real accounts typically include those found in the statement of financial position. These accounts are generally divided into three categories: assets, liabilities, and equity.

1. Assets

Assets include items such as cash, bank accounts, trade receivables, deposits, and fixed assets. These serve as the primary tools for a company’s operational activities.

2. Liabilities

Liabilities cover obligations such as trade payables, salary payables, and mortgages that the company must settle. It’s important to track the due dates or repayment periods of these liabilities.

3. Equity

Equity represents the total assets or wealth owned by the company, such as land, cash, buildings, and other forms of ownership. In the financial position statement, equity includes retained earnings (or losses) and owner’s equity.

With advancements in technology, accounting staff no longer need to worry about distinguishing account types. Modern Accounting Systems can help businesses monitor financial conditions comprehensively, including cash balances, receivables, payables, and other accounts.

Benefits of Knowing the Differences of Real and Nominal Accounts

To optimize financial management, it is crucial for companies to understand the difference between real and nominal accounts. Differentiating these accounts is essential, as each serves a unique purpose.

Helps companies optimize financial management by understanding each account’s unique purpose.
Makes financial recording more organized, resulting in clearer insights into the company’s financial information.
Allows businesses to track asset growth and development more effectively through accurate transaction reviews.
Supports easier asset monitoring and forecasting, providing valuable guidance for decision-making and policy formulation.

As a result, asset development can be easily monitored and used to make forecasts, providing valuable insights for companies when formulating policies.

HashMicro: Simplifying Real and Nominal Accounts with Smart Accounting SoftwareUnderstanding real and nominal accounts is key to accurate reporting and decisions. As businesses grow, manual management becomes harder, especially with BIR compliance and accuracy demands.

For businesses in the Philippines, HashMicro’s Accounting Software is your go-to tool for automating account categorization and ensuring accurate financial reports. Kaya mas madali na rin mag-comply sa BIR standards, hassle-free.

With real-time insights and seamless integrations, it helps you manage everything, from daily expenses to long-term assets, so you can focus on growing your business and boosting profits. And below are the advanced features that make your job easier:

Bank Integration – Auto Reconciliation: Ensures that internal bookkeeping aligns with bank transaction records, which provides financial data for both real (e.g., assets, liabilities) and nominal (e.g., expenses, revenue) accounts.
Profit & Loss vs Budget & Forecast: Tracks deviations between actual profit/loss (nominal accounts) and budgeted figures.
Cash Flow Reports: Monitors cash inflows and outflows (real accounts like cash).
Financial Statement with Budget Comparison: Compares actual financial performance (real accounts) with budgeted expectations, enabling better financial oversight and control.
Multi-Level Analytical (Compare Financial Statement per project, branch, etc.): Provides detailed analysis of financial data across categories like branches or projects.

Conclusion

Real and nominal accounts are essential for the proper tracking and reporting of transactions. Nominal accounts refer to temporary transactions, such as income and expenses, that are reset each fiscal period. Meanwhile, real accounts record assets, liabilities, and equity that are carried forward to subsequent periods.

For businesses in the Philippines, manual account management is tiring and error-prone. HashMicro’s Accounting Software automates processes and provides real-time insights, ensuring BIR-compliant and efficient reporting.

HashMicro’s advanced tools, such as Auto Reconciliation and Cash Flow Reports, are designed for your business success. Whether you’re managing daily expenses or long-term assets, the software ensures accurate data and sound decisions.

Take control of your finances with HashMicro and try the free demo today!

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.