Startup businesses have limited working capital before they reach their break-even point. Keeping a thorough track of every fiscal transaction in a specific time period is crucial for sustenance and growth.
In bigger businesses with multiple departments dealing with thousands of transactions, keeping track of accounts can get challenging.
A nominal account is the best solution to keep track of transactions in a segmented way, to avoid errors and mishaps at the end of the accounting period.
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What is a Nominal Account?
A nominal account is a general ledger maintained by a business. It keeps a detailed record of all the revenue generated, expenses made, and profits or losses documented by this company in a given financial year. This temporary account is closed by the company at the end of the financial year.
The account opens with a zero balance every accounting cycle. When it is closed, the net balance gets transferred to the capital account or retained earnings account of the company – based on its ownership structure.
Some common types of nominal accounts include the following:
- Sales Account: Contains details about all the sales transactions
- Purchase Account: Ledger account dedicated to recording inventory purchases
- Cash Account: A book where all the cash transaction data is collected
- Expense Account: Ledger to keep a tab on everyday expenses of an organization
Nominal Account vs Real Account
There are three kinds of accounts used when recording financial transactions.
- Nominal Account
- Real Account
- Personal Account
The real account of a business takes into consideration the balance sheet, equities, assets, and liabilities of the company. Some basic differences between such a real account and a nominal account are discussed below.
| Real Account | Nominal Account |
|---|---|
| Permanent in nature | Temporary in nature |
| At the end of a set time period, the balance can be carried over | At the end of the financial year, the account balance resets to zero |
| The primary target is to record profits and losses | The primary target is to evaluate outstanding obligations and current assets |
Rules to Be Followed for Nominal Accounts
Financial experts refer to certain specific guidelines as the golden rules that a business must follow while maintaining a nominal account. These include:
- Debiting all of the expenses of the company
- Crediting every income received
- Debiting all the losses sustained by the organization
- Crediting all the gains earned
Role of RazorpayX in Maintaining Nominal Accounts
RazorpayX, had laid significant emphasis on automating how commercial transactions are done by a company. As a result, keeping track of profits made or expenses borne by the organization can become comparatively hassle-free.
- How RazorpayX Helps with Invoice Tracking
For instance, with its Vendor Payments facility, it becomes easier for your business to follow proper bookkeeping practices regarding generated invoices. The software also ensures that your company remains compliant with the taxation regulations in place.
The facility also makes sure that maintaining a nominal account becomes comparatively less time-consuming so that proper and effective resource allocation can be done in order to value-added production. To elaborate, with this platform, you can provide access to the challans, invoices, and other necessary documents to your Chartered Accountant with just a few clicks – ensuring the calculations can be done in minimal turn-around time.
- How RazorpayX Helps with Forex Record-Keeping
Although the nominal account is maintained for internal purposes, the records kept here can be crucial to corroborate the public records undergoing a statutory audit. Therefore, proper data entry regarding FDI inflow is essential.
That is why signing up with RazorpayX Forex Funding can be highly effective for a company. The dedicated team of experts on this platform is capable of providing your company with the necessary advice and guidance regarding staying compliant with the RBI guidelines when recording the foreign exchange inflow. Moreover, these specialists are enlisted to complete the paperwork necessary on your behalf.
FAQs
Can nominal accounts represent an asset?
Nominal accounts are not representative of any tangible asset.
Is salary account a nominal account?
A salary account is a nominal account.
What are the different outcomes of a nominal account?
Based on the matters under its purview, the final outcome of a nominal account can only be a record of profit generated or loss sustained. Therefore, this profited or lost amount is transferred to the current account of the business.
