Nominal and real accounts- Discussion post Basic Accounting PDF

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Summary

The full "accounting cycle" which culminates in closing the books and producing financial statements. Discuss the differences between Permanent "real" accounts and Temporary ¨nominal¨ accounts:
• What type of information is contained in nominal accounts, and what type of information is contain...

Description

The full "accounting cycle" which culminates in closing the books and producing financial statements. Discuss the differences between Permanent "real" accounts and Temporary ¨nominal¨ accounts: 

What type of information is contained in nominal accounts, and what type of information is contained in real accounts?



Which financial statement contains the information from nominal accounts and which contains the information from real accounts?



Provide an example of real accounts and an example of nominal accounts.

Discuss the differences between Permanent "real" accounts and Temporary ¨nominal¨ accounts.

The textbook states that "Permanent (real) accounts are accounts that transfer balances to the next period." Put simply, "real" accounts are records whose transactions are needed for the next accounting period for a business's operations. The textbook explains "nominal" accounts by stating that "These accounts are temporary because they keep their balances during the current accounting period and are set back to zero when the period ends." Put simply, these are the accounts whose transactions are "used up" for one accounting period to determine the financial operations of a business.

What type of information is contained in nominal accounts? Nominal accounts provide a picture of operations for one accounting period. The information contained in nominal accounts is a) The income or increase in net assets that an entity has from its normal activities such as the sale of goods and services (revenue)

b) Money spent or cost incurred by a business in order to generate revenue (expenses) such as salaries expense

c) Distribution to shareholders of some of the profit/earnings a company

The revenues and expenses are transferred over to a temporary account known as income summary which along with the dividends account is transferred over to the final account called Statement of Retained Earnings.

What type of information is contained in real accounts? Real accounts do not lose their balance, as they are required to be taken into consideration for further fiscal periods. Such accounts include a) Assets (current and non-current) for instance, accounts receivable

b) Liabilities (current and non-current) for example accounts payable

c) Stockholder's equity

d) Contra assets which are asset accounts that have a zero or a credit balance such as accumulated depreciation

Which financial statement contains the information from nominal accounts? 2 financial statements contain this information 1- Income statement which has revenues and expenses

2- Statement of shareholder's equity which contains dividends. Since dividends have no impact on profits, it does not appear on the income statement

Which financial statement contains the information from real accounts? The financial statement that contains the information from real accounts is the Balance Sheet with accounts such as assets, liabilities, and shareholder's equity.

Provide an example of real accounts and an example of nominal accounts. One example of real accounts is Accounts Receivable which records the balance of money due to a firm for goods and services delivered or used but not yet paid for by customers. An example of nominal accounts is the Service Revenue account which is the income a company generates from providing a service.

Reference:

Franklin, M. Graybeal, P. & Cooper, D. (2020). Principles of accounting, volume 1: Financial accounting. Open Stax Rice University. https://openstax.org/details/books/principles-financial-accounting...