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.
Key Takeaways
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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.
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. |
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
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) |
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| 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.
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
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. 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: 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.
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. If you manage receivables, tracking their aging is key to spotting overdue payments early.
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.
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
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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.
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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.
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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.
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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.
