Legal Definitions - nominal account

A nominal account is a temporary financial record used to track specific types of financial activity, such as revenues, expenses, gains, or losses, over a defined period. Unlike permanent accounts that carry balances forward indefinitely, nominal accounts are "closed out" at the end of each accounting period (e.g., a fiscal year). Their balances are transferred to a permanent account, and the nominal accounts are then reset to zero to begin tracking activity for the next period. This process helps in calculating periodic financial performance, such as profit or loss.

• Example 1: Small Business Annual Performance
  A local bakery, "Sweet Treats Inc.," uses a nominal account called "Sales Revenue" to record all income from selling pastries and coffee throughout its fiscal year. It also has a "Utilities Expense" nominal account to track monthly electricity and water bills. At the end of the year, the total balance from "Sales Revenue" and "Utilities Expense" is used to calculate the bakery's net profit or loss for that year. After this calculation, both accounts are closed, and their balances are transferred to the bakery's permanent "Retained Earnings" account. They then start fresh with a zero balance in "Sales Revenue" and "Utilities Expense" for the new fiscal year.

  Explanation: The "Sales Revenue" and "Utilities Expense" accounts are nominal because they track financial activity for a specific period (one fiscal year) and are then reset to zero, rather than accumulating balances indefinitely.

• Example 2: Non-Profit Project Budget
  "Green Earth Foundation," a non-profit organization, receives a one-year grant to fund a specific environmental education program. They establish a "Program Grant Income" nominal account to record the grant disbursements and a "Program Staff Salaries" nominal account to track the wages paid to educators for this specific program. At the end of the grant period, these accounts are closed to determine the program's financial outcome. The net balance is then transferred to the foundation's general fund, and the "Program Grant Income" and "Program Staff Salaries" accounts are no longer active for that specific program.

  Explanation: These accounts are nominal because they are temporary, existing only for the duration of the specific one-year program to track its dedicated income and expenses, and are then closed.

• Example 3: Freelancer Quarterly Earnings
  A freelance graphic designer, Alex, tracks his earnings from client projects in a "Design Service Income" nominal account for each quarter. At the end of the quarter, the total amount in this account is transferred to his personal business's "Owner's Equity" account, reflecting his total income for that three-month period. The "Design Service Income" account is then reset to zero to start tracking earnings for the next quarter.

  Explanation: The "Design Service Income" account is nominal because it tracks earnings for a specific, relatively short period (a quarter) and is then cleared out, allowing for a fresh start in the subsequent period to measure performance.