Why are revenue and expense accounts called temporary or nominal accounts?

Name: Problem 4, Chapter 3: Intermediate Accounting
Uploaded: 2020-05-08T10:57:22-08:00
Duration: 6 min 31 s
Channel: Puneet Prajapati
Description: Why are revenue and expense accounts called temporary or nominal accounts?

Why are revenue and expense accounts called temporary or...

Key Concepts

Temporary (Nominal) Accounts

Temporary or nominal accounts are accounts that record revenues, expenses, gains, and losses over a specific accounting period. They are called 'temporary' because their balances are not carried forward into the next period, which allows businesses to measure performance over distinct intervals and reset for new period calculations.

Closing Process

The closing process is the procedure used to transfer the balances of temporary (nominal) accounts to permanent accounts, typically to retained earnings. This process resets the revenue and expense accounts to zero at the end of each period, ensuring that the financial results of each period are reported independently and accurately.

Transcript

00:01 Okay, so we are going to understand different types of account in accounting as a subject.

00:15 We need to have a understanding that how many types of accounts we do have in accounting, okay? so first one is real accounts.

00:38 Second one is personal account.

00:48 So we write a short form a obliq c for account.

00:54 Okay.

00:54 However, in case of examination, you will follow this notation, not this one.

01:02 Personal account and there is a last one which we say as nominal account.

01:16 Now what happens? so real account, i will give you example, not a technical definition to understand it because in case of accounting is a practical subject.

01:43 So instead of having a concrete or technical definition, we will have related examples so that you can understand it better.

01:53 So for assets, tangible assets, we will have a real account, account for the transaction in relation to tangible assets.

02:09 So what are tangible assets? you can write it down.

02:14 Machinery, machinery, furniture, okay, inventory.

02:40 However, inventory is an asset, but there are, but.

02:46 Inventory is not used for production capacity.

02:50 Like when i say machinery, so much there is a difference between machinery and inventory.

02:56 However, to account for the transaction in case of inventory also, we will open a real account.

03:05 So there are a lot of examples.

03:06 The list is not exhausted...

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