Large companies or business owners who carry out financial management activities well will certainly apply basic accounting principles. In accounting, each account is grouped into two groups.
What are the groups of accounting accounts? These two groups are referred to as nominal accounts and real accounts. In general, the function of accounting is to be able to record every financial activity of a company. These financial activities will then be compiled into an accounting system which will then be reported in the form of financial reports which have been prepared in such a way by an accountant.
Account can be interpreted as a word for financial transactions that have been recorded. Apart from that, the recording process will also be recorded in the form of transactions that have been adjusted to the affected accounts.
Nominal accounts and real accounts are different, Mudalovers , they also have different groups. What is meant by a nominal account and how is it different from a real account? Check out the further explanation below!
Definition of Nominal Account
One important aspect that needs to be understood in accounting is the various types of accounts. There are two main groups of accounts. One of them is a nominal account, which includes other accounts.
In simple terms, an account is a term used in financial records to reflect or represent certain information within a company. Understanding everything about the account is the key to “reading” the company’s situation well.
In technical terms, mastery of accounts, including nominal accounts, is an important first step in preparing accurate financial reports. A good financial report is one that can show the true condition of the company.
From the explanation above, it can be concluded that the simple definition of an account is a systematic record containing financial transactions. Accounts in accounting, whether real or nominal accounts, have an important position, because they have an important function.
The first important function of an account is that the account is used to record elements such as assets, equity, privileges and expenses. In addition, accounts are also used to reflect increases or decreases in capital, expenses, debts, and assets.
Furthermore, accounts also play a role in providing information about the position of capital, debt and assets, as well as changes that occur in these elements. This is an important basis for preparing financial reports.
What is the use of account groupings, such as nominal accounts, in an accounting context?
One of the benefits is to simplify the process of recording transactions according to the existing account type.
This grouping also helps prepare bookkeeping more easily and regularly, which will later be used in preparing financial reports. This financial report has an important role as crucial analytical material in decision making.
Apart from that, account grouping is also useful in preventing errors in accounting activities which can have a negative impact on other company activities.
In the field of accounting, there are five main accounts which include: assets (also known as assets/assets), liabilities (liabilities), capital (equity), expenses, and income. Each of these accounts reflects a particular aspect of a company.
These five accounts can be further divided into two large groups, namely real accounts and nominal accounts. Assets, liabilities and capital are included in the real account group, while expenses and income are included in the nominal account group.
As the name suggests, nominal accounts are recorded in the income statement every year. The income statement is the part of the financial report that indicates the difference between profit and loss.
If profits exceed losses, it indicates that the company is making a profit. However, if the opposite happens, the company will experience losses.
To indicate whether the company experienced a loss or profit during the year, the nominal account will be closed at the end of the accounting period using a closing journal. The aim is so that no balance is carried over to the next period, by moving the nominal account balance to the capital account in the balance sheet.
This is why nominal accounts are often referred to as temporary accounts. This is different from a real account, which at the end of a period will be transferred to the next period as an opening balance.
To find out more about account grouping, Mudalovers can read the book Introduction to Accounting 1 Easy Accounting Learning. Not only about account material, this book will also discuss mathematical calculations, tax payments and others to learn accounting easily and without having to worry!
Types of Nominal Accounts and Real Accounts
To make it easier for Mudalovers to see the difference between nominal accounts and real accounts, here are the types of nominal accounts and real accounts that Mudalovers need to learn about.
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Nominal Account
This nominal account is divided into two, namely income and expenses. The following is an explanation of the two groups of nominal accounts:
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Income
Income falls under the nominal account category. The income account includes increases in assets originating from company activities and operations. In recording practices, revenue is generated and recorded based on sales of goods or services within a certain time period.
Revenue accounts also consist of two types, namely operating income and other income. Operating income is also known as fixed income, recorded based on sales activities or the company’s core activities.
Of course, each company has a different type of income, depending on what field the company operates in. For example, when there is a motorbike company, of course the company’s main income is from selling motorbikes or perhaps spare parts.
However, if there is a video streaming company, its main income is the subscription fees paid by customers. Meanwhile, other income accounts include non-fixed income or non-main or non-business income, such as interest and company commissions, which are generated and recorded.
Examples of non-principal income are interest, rent, royalties, dividends and profits from the sale of fixed assets.
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Burden
Expenses are the total costs that must be borne by the company in carrying out its operational activities. Examples include sales costs, company equipment, and others.
Just like income, expense accounts can also be divided into two groups, namely income expenses and other expenses.
Operational expenses refer to the costs that a company must incur in carrying out its operational activities. Meanwhile, other expenses include costs that occur suddenly and must be paid in a certain nominal amount.
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Real Account
If in a nominal account there are only two groups, namely income and expenses, in a real account there are three groups, namely debt, assets or assets and capital or equity.
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Assets or Assets
The company’s assets or assets are one of the group parts in the real account. In general, company assets are divided into deposits, cash and company receivables.
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Debt or Liability
A group of debt accounts is an obligation that must be paid by the company. This means that the debt will occur or be recorded when the company has used the goods or services first. Debt or liability accounts must also always be recorded within the time period or according to the due date for repayment.
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Capital or Equity
The next group of real accounts is equity or capital. Equity is the total of assets or assets owned by a company.
The equity account is also obtained and recorded in the form of money, land, buildings or other forms owned by the company.
The capital account will be reported in the balance sheet when the period has ended, this is because the capital account is part of the real account.
If Mudalovers is an economics student who is studying accounting, you need to know that this material about accounts is very important so that Mudalovers can learn the next material.
Therefore, learn more about nominal and real accounts in the book Introduction to Accounting II. In this book, complete practice questions are available with discussion.
How to Record Nominal Accounts
All accounts need to be arranged in a chart of accounts using numbers as coding. This aims to make it easier to record both in the ledger and in bookkeeping references.
Asset accounts start with the number “1”, liability accounts start with the number “2”, and capital accounts start with the number “3”. Meanwhile, nominal accounts, such as income and expenses, are numbered starting with “4” and “5”. Here’s an example.
Income (400 to 499)
401 service income
402 other income
Load (500 to 599)
501 payroll expenses
502 other loads
To be able to debit or credit these two nominal accounts, an accountant needs to remember the basic principles of accounting.
The normal balance for a revenue account is a credit, which means if revenue increases, it will be recorded as a credit. Meanwhile, the normal balance for expense accounts is debit. If income decreases, it will be recorded as a debit, and if expenses decrease, it will be recorded as a credit.
Then don’t forget that every account that experiences changes will involve at least one other account in a negative relationship. This means that if one increases, the other accounts will definitely decrease.
To write down the nominal account that is being processed in the closing journal, Mudalovers can write down the income and expense account balances transferred to the account which is known as the profit and loss summary or income summary. The balance in the profit and loss summary will then be transferred to the owner’s capital account.
Having difficulty memorizing the code for writing nominal accounts? Or don’t you understand the nominal and asset account material? Mudalovers can study this material further in the Magic Book Introduction to Accounting.
This book is designed to be easy for readers to understand by using an accounting science approach according to IFRS standards.
Purpose of Account Grouping
Why is there a need for account grouping in accounting? The company has usually grouped accounts based on nominal accounts and real accounts. Especially big companies.
In general, this account grouping will be included in the company’s financial records. There are several reasons why companies share accounts, here are the explanations:
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To be able to distinguish each account
The first aim of grouping nominal accounts and real accounts is so that these two accounts are recorded based on their groups. So that companies can see and group account types in more detail and according to their respective characteristics.
Apart from that, another purpose of grouping accounts is so that the recording process in a system or accounting software can be carried out more easily.
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Become a source of information
The grouping of nominal accounts and real accounts can also allow companies to obtain various kinds of information that is important in recording these accounts.
For example, when a company wants to see real account information, the company can see the balance sheet report. On the other hand, companies can see nominal accounts by reading the profit and loss report.
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Asset growth
Companies can find out asset developments by looking at reports on nominal accounts and real accounts. The method is to pay attention to the amount of capital, assets and income.
With reports that are recorded and grouped properly into real accounts and nominal accounts, companies can know and predict asset developments. Not only that, companies can also make reports from real accounts and nominal accounts into considerations related to company policy.
Difference between Nominal Account and Real Account
From the previous explanation, Mudalovers now certainly know that it is important to group account records according to their type and nature. By grouping these accounts, it will be easier for companies to differentiate and find the information they need. So what is the difference between a nominal account and a real account?
Mudalovers need to know the difference between nominal accounts and real accounts so that Mudalovers can write down nominal accounts and real accounts properly.
- A nominal account is an account that always starts with a zero balance and ends with a zero balance.
Meanwhile, the real account cannot return to zero in the current fiscal year. Real accounts that existed in the previous year can also be carried over to the next fiscal year.
- The second difference between nominal accounts and real accounts is the account recording. The nominal account is included in the profit and loss statement, which is an account used to record profits or profits, expenses, income and losses experienced by the company.
Meanwhile, real accounts will be recorded in the balance sheet report, namely accounts that have the function of recording owner’s equity, liabilities and assets belonging to the company.
- In each fiscal year, the balance in the nominal account can be transferred to the real account to make net changes during the financial year.
- The recordings in the entry section of the nominal account must be in accordance with the journal entries relating to time and date.
From the explanation above, it can be concluded that nominal accounts are a group of accounts where each transaction is written in the profit and loss report. In these records, there is information regarding the company’s sales and expenses.