Explain real and nominal accounts with examples ?

In accounting, real and nominal accounts are two fundamental categories used to classify different types of accounts based on their nature and purpose. These distinctions are essential for understanding the accounting process and preparing financial statements.

Real Accounts:

Real accounts, also known as permanent accounts, represent assets, liabilities, and owner's equity. These accounts carry forward their balances from one accounting period to another. The balances in real accounts are not closed at the end of the accounting year but are carried forward to the next year. Real accounts are found on the balance sheet and are used to determine the company's financial position.

Examples of real accounts:

a. Asset Accounts: These accounts represent resources owned by the company that have economic value. Common examples include:

• Cash
• Accounts Receivable
• Inventory
• Property, Plant, and Equipment (PP&E)
• Investments

b. Liability Accounts: These accounts represent the company's obligations or debts to external parties. Examples include:

• Accounts Payable
• Loans Payable
• Notes Payable
• Accrued Liabilities

c. Owner's Equity Accounts: These accounts represent the owner's interest in the company. Examples include:

• Capital (contributed by the owner)
• Retained Earnings (accumulated profits and losses)

Nominal Accounts:

Nominal accounts, also known as temporary accounts, represent revenues, expenses, gains, and losses. Unlike real accounts, the balances in nominal accounts are closed at the end of each accounting period and are transferred to the retained earnings account. This process resets the nominal account balances for the new accounting period.

Examples of nominal accounts:

a. Revenue Accounts: These accounts represent income earned by the company through its regular business operations. Examples include:

• Sales Revenue
• Service Revenue
• Interest Income
• Dividend Income

b. Expense Accounts: These accounts represent costs incurred by the company to generate revenue. Examples include:

• Cost of Goods Sold (COGS)
• Salaries and Wages Expense
• Rent Expense
• Advertising Expense

c. Gain Accounts: These accounts represent income from non-operating activities or transactions. Examples include gains from the sale of assets or investments.

d. Loss Accounts: These accounts represent losses from non-operating activities or transactions. Examples include losses from the sale of assets or investments.

At the end of the accounting year, the balances of all nominal accounts are closed (transferred to the retained earnings account), and the real accounts continue to carry their balances forward to the next accounting period. This process is crucial for determining the company's net income and updating the retained earnings, which ultimately affects the owner's equity.