What are Nominal Accounts in Accounting?

What is a Nominal Account? Definition with Examples

A nominal account is an accounting ledger that captures all revenue, expenditure, gain and loss transactions during a financial year. Unlike asset or liability accounts, a nominal account does not carry its balance forward to the next year. Once the year closes, every nominal account is zeroed out, and its net balance is transferred to the profit and loss (P&L) account, giving the business a clean start for the new period.

The rule that governs every entry in a nominal account is straightforward: debit all expenses and losses, credit all incomes and gains. This principle comes from the golden rules of accounting and applies uniformly, whether the account tracks sales revenue, office rent or a one-time insurance claim.

What are the common examples of nominal accounts?

Most day-to-day transactions a business records will touch at least one nominal account. The following are the most frequently encountered categories.

Revenue accounts

These capture money earned from the core business activity and other sources.

Sales account: Records income from goods or services sold
Interest received account: Tracks interest earned on deposits or loans given
Commission received account: Income earned for acting as an agent or broker
Rent received account: Income from property let out by the business

Expense accounts

These records show the costs incurred to run the business during the year.

Salaries account: Wages and salaries paid to employees
Rent paid account: Rent for office, factory or warehouse premises
Electricity charges account: Electricity costs for running the business
Advertising account: Spending on promotions, campaigns and marketing
Depreciation account: The periodic write-down of an asset's value

Gain and loss accounts

These accounts capture events that are not part of regular trading.

Loss on sale of assets account: Records a shortfall when an asset sells below its book value
Profit on sale of investments account: Records a surplus when an investment sells above its cost

How a nominal account works: A practical example

Consider a small textile trader in Surat with the following transactions in the financial year 2025-26:

Office rent paid: ₹1,80,000
Sales revenue: ₹80,00,000
Purchase of raw material: ₹55,00,000
Salaries paid: ₹8,00,000
Interest received on a bank deposit: ₹20,000

Each transaction is posted to its own nominal account. At the end of the year, the net position looks like this:

Total income = ₹80,20,000 (₹80,00,000 sales + ₹20,000 interest)

Total expenditure = = ₹64,80,000 (₹55,00,000 + ₹8,00,000 + ₹1,80,000)

Net profit transferred to P&L: ₹15,40,000

All five nominal accounts are then reset to zero. The next year's entries begin on a blank slate, and the ₹15,40,000 sits in the capital or retained earnings account, which is a real account and carries forward.

What are the closing entries, and why do they matter?

At year-end, an accountant passes closing journal entries to transfer the balance of each nominal account to the P&L account. This process, sometimes called ‘closing the books’, does two things.

It calculates the net profit or loss for the year by consolidating all income and expense balances.
It resets nominal accounts to zero, so the next year's transactions are not mixed with the current year's.

Under the Companies Act, 2013, companies registered in India must prepare financial statements at the end of each accounting period, making this closing process a regulatory requirement rather than just good practice.

Conclusion

Nominal accounts are the lens through which a business measures its performance in any given year. Getting them right means every rupee of income and every expense is captured accurately, and the closing entries produce financial statements that reflect the true picture.

Businesses that maintain high volumes of transactions across dozens of nominal accounts, whether tracking GST-eligible sales, TDS-deducted expenses or multi-branch overheads, benefit from software that automates the posting and closing process.

TallyPrime handles this end-to-end, from ledger creation to automatic P&L transfer, reducing the risk of manual errors at year-end close.

Is the GST input tax credit account a nominal account?

No. A GST ITC account is a personal account because it represents an amount receivable from the government. Nominal accounts capture income and expenses; the ITC account holds a balance that carries forward until it is set off against output GST liability.

What happens to a nominal account if the business makes a loss?

If expenses exceed income, the nominal accounts still close at year-end, but the balance transferred to the P&L account represents a net loss rather than a profit. That loss reduces the owner's capital or is carried as a debit balance in retained earnings, depending on the entity type.

Can a nominal account ever have a debit balance?

Yes. Expense and loss accounts normally carry a debit balance throughout the year, while income and gain accounts carry a credit balance. Only when they are closed and transferred to P&L do these individual balances disappear. It is the net P&L figure that ultimately shows whether the year ended in profit or loss.

Are depreciation accounts nominal accounts?

Yes. Depreciation is an expense charged to the profit and loss account each year. The depreciation account is therefore a nominal account and is closed at year-end. The accumulated depreciation, however, is recorded as a contra account to the fixed asset on the balance sheet, which is a real account.

Do sole proprietors in India also maintain nominal accounts?

Yes. The structure of accounts under double-entry bookkeeping applies regardless of the business form. A sole proprietor who maintains proper accounts will have nominal accounts for income and expenses, just like a partnership firm or a private limited company.

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