Nominal accounts record the financial transactions of a business in a particular category. For example, purchase accounts, sales accounts, salary A/C, and commission A/C otherwise known as temporary accounts. Nominal codes are unique reference numbers given to each ‘nominal’ account for a business. Continue to read to find out more about these accounts and codes.
Definition of Nominal Account
In accounting, nominal accounts are the general ledger accounts that are closed at the end of each accounting year. The closing process transfers their end-of-year balances from the accounts to a permanent or real general ledger account. As a result, the nominal accounts are also referred to as temporary accounts. The closing process also means that each account will start the next accounting year with a zero balance.
Examples of Nominal Accounts
The nominal accounts include:
- All of a company’s income statement accounts
- The owner’s drawing account
The income statement accounts record and report the company’s revenues, expenses, gains, and losses. When the company is a sole proprietorship, the balances in these accounts will be closed by transferring the net amount into the owner’s capital account. If the business is a corporation, the balances will be transferred to the retained earnings account.
Since the owner’s drawing account is not an income statement account, its balance will be closed by transferring its debit balance directly into the owner’s capital account.
Nominal Codes are specific codes assigned to each item of income/expenditure within your accounts, to help differentiate between their purpose. For example you would have one nominal code for ‘Hotels’ and another for ‘stationary’; if you stayed in a hotel you’d assign that expenditure the specific ‘hotel’ nominal code within your accounts, and if you bought some stationary for the office then that would be assigned the ‘stationary’ nominal code.
This categorisation enables you to very quickly and easily reference what each your income/expenditure was for, this is useful for 2 reasons:
- It makes it very easy to manage your business income/expenditure and find out where your business is spending most of its outgoings.
- When it comes time to complete your tax return it’s very easy to list your expenses within the proper tax return expense categories since they’re already listed with relevant nominal codes.
How we can help
Here at Carrington Blake Accountancy, we can help lift the burden and oversee all your nominal accounts. Our experienced accountants are happy to help with any of business accountancy needs. Contact us today for further information on the services we offer.