Nominal Accounts MCQs Quiz | Class 9

Understanding Nominal Accounts

Nominal Accounts are a fundamental concept in accounting. They are temporary accounts related to all the expenses, losses, incomes, and gains of a business for a specific accounting period. The primary purpose of these accounts is to determine the financial performance, i.e., the net profit or net loss, of the business at the end of that period.

The Golden Rule of Nominal Accounts

The rule for recording transactions in Nominal Accounts is simple and crucial:

Debit all Expenses and Losses; Credit all Incomes and Gains.

This rule helps in correctly posting transactions to the ledger and is essential for preparing the final accounts.

Key Characteristics of Nominal Accounts

• Temporary Nature: These accounts are opened at the beginning of an accounting year and closed at the end of it.
• Performance Measurement: They track the financial performance of the business.
• Transfer to Final Accounts: The balances of all nominal accounts are transferred to the Trading and Profit & Loss Account at the end of the year to calculate profit or loss. They do not have a balance carried forward to the next year.

Categorization of Nominal Accounts

1. Expenses Accounts

Expenses are the costs incurred by a business in the process of earning revenue. According to the rule, all expense accounts are debited. Examples include:

• Salaries Account: Payment made to employees.
• Rent Account: Payment for using premises.
• Wages Account: Payment to workers.
• Printing and Stationery Account: Cost of office supplies.
• Carriage Inwards/Outwards: Transportation costs.

2. Losses Accounts

Losses are amounts lost by the business without receiving any benefit in return. Like expenses, all losses are debited. Examples include:

• Loss by Fire/Theft Account: Loss of goods or assets due to unforeseen events.
• Loss on Sale of an Asset Account: When an asset is sold for less than its book value.

3. Incomes Accounts

Incomes are revenues earned by the business from its operational activities. According to the rule, all income accounts are credited. Examples include:

• Commission Received Account: Income earned for providing a service.
• Rent Received Account: Income from letting out property.
• Interest Received Account: Income earned on investments or bank deposits.
• Discount Received Account: Reduction in price from a supplier.

4. Gains Accounts

Gains are profits that arise from transactions that are not part of the regular business operations. Like incomes, all gains are credited. Examples include:

• Profit on Sale of an Asset Account: When an asset is sold for more than its book value.
• Gain from a Lawsuit: Unexpected income from a legal settlement.

Summary Table

Quick Revision Points

• Nominal accounts relate to income, expenses, gains, and losses.
• The golden rule is: Debit all expenses & losses, Credit all incomes & gains.
• These accounts are also known as temporary accounts.
• Their balances are transferred to the Profit & Loss Account at year-end.
• The ultimate goal of maintaining nominal accounts is to find the net profit or loss.

Extra Practice Questions

1. Classify ‘Carriage Outwards’ account. Is it debited or credited when paid?
2. If a business receives a discount from a creditor, which nominal account is credited?
3. What is the journal entry for ‘Rent paid to landlord’?
4. Why are nominal accounts closed at the end of the accounting year?
5. Is ‘Cash Account’ a nominal account? Why or why not?