Explain nominal accounts with example
Nominal accounts are accounts that record income, expenses, gains, and losses. They are temporary accounts used to determine the net profit or loss for a specific accounting period. At the end of each accounting period, the balances in nominal accounts are transferred to the capital account or retained earnings, effectively resetting their balances to zero for the next period.
### Examples of Nominal Accounts
1. **Revenue Accounts:** These accounts record the income earned by the business. Examples include:
- **Sales Revenue:** Records income from the sale of goods or services.
- **Service Revenue:** Records income from providing services.
2. **Expense Accounts:** These accounts record the costs incurred by the business to earn revenue. Examples include:
- **Rent Expense:** Records the cost of renting office space or equipment.
- **Salaries Expense:** Records the cost of employee wages.
- **Utilities Expense:** Records the cost of utilities like electricity, water, and gas.
3. **Gain Accounts:** These accounts record income from activities other than the main operations of the business. Examples include:
- **Gain on Sale of Assets:** Records income from selling a fixed asset at a profit.
4. **Loss Accounts:** These accounts record losses from activities other than the main operations of the business. Examples include:
- **Loss on Sale of Assets:** Records a loss incurred from selling a fixed asset at a price lower than its book value.
### Example Entry
Let's say a company, ABC Corp, earns $10,000 in sales revenue and incurs $2,000 in rent expense during a month. The journal entries would be:
1. **Recording Sales Revenue:**
```
Date Account Debit Credit
---------- ------------------ ------- -------
[Date] Accounts Receivable 10,000
Sales Revenue 10,000
```
2. **Recording Rent Expense:**
```
Date Account Debit Credit
---------- ------------------ ------- -------
[Date] Rent Expense 2,000
Cash 2,000
```
At the end of the accounting period, the balances in these nominal accounts will be closed (transferred) to the capital account or retained earnings. For example:
3. **Closing Sales Revenue:**
```
Date Account Debit Credit
---------- ------------------ ------- -------
[End Date] Sales Revenue 10,000
Retained Earnings 10,000
```
4. **Closing Rent Expense:**
```
Date Account Debit Credit
---------- ------------------ ------- -------
[End Date] Retained Earnings 2,000
Rent Expense 2,000
```
This process resets the nominal accounts to zero, ready for the next accounting period.