A nominal account is an account in which accounting transactions are stored for one fiscal year. At the end of the fiscal year, the balances in these accounts are transferred into permanent accounts. Doing so resets the balances in the nominal accounts to zero, and prepares them to accept a new set of transactions in the next fiscal year. Nominal accounts are used to collect accounting transaction information for the following types of transactions, all of which appear in the income statement:
Thus, revenues from the sale of services, the cost of goods sold, and a loss on sale of an asset are all examples of the transactions that are recorded in nominal accounts.
When the balances in nominal accounts are cleared out at the end of the year, their balances may be transferred directly into the retained earnings account, or they may first be transferred into an income summary account, and immediately transferred from there to the retained earnings account.
The following journal entries show how the balances in nominal accounts are shifted through an income summary account to the retained earnings account:
1. Shift all $10,000 of revenues generated during the month to the income summary account:
2. Shift all $9,000 of expenses generated during the month to the income summary account (there is assumed to be just one expense account):
3. Shift the $1,000 net profit balance in the income summary account to the retained earnings account:
The preceding entries can be completed manually. However, an accounting software package will handle the transfer tasks automatically, once an authorized user sets the rollover flag in the software to close the old reporting year and shift record keeping to the next fiscal year.
A nominal account is also known as a temporary account.