Why nominal accounts are not balanced like real and personal account i...
**Introduction:**
Nominal accounts, also known as income and expense accounts, are a category of accounts used in accounting to record revenues, expenses, gains, and losses. Unlike real and personal accounts, nominal accounts are not balanced at the end of an accounting period. Instead, the balances in nominal accounts are transferred to the trading account or the profit and loss account.
**Explanation:**
There are several reasons why nominal accounts are not balanced like real and personal accounts:
**1. Nature of Nominal Accounts:**
Nominal accounts represent the flows of revenues, expenses, gains, and losses that occur during a specific accounting period. These accounts are temporary in nature and are closed at the end of each accounting period. As a result, the balances in these accounts are not carried forward to the next period.
**2. Objective of Trading Account:**
The trading account is prepared to determine the gross profit or gross loss of a business for a specific period. It includes the opening stock, purchases, direct expenses, and sales. By transferring the balances from nominal accounts to the trading account, the net effect of revenues and expenses on the gross profit or gross loss can be determined.
**3. Objective of Profit and Loss Account:**
The profit and loss account is prepared to ascertain the net profit or net loss of a business for a specific period. It includes all revenues, expenses, gains, and losses. By transferring the balances from nominal accounts to the profit and loss account, the net effect of all income and expenses can be determined.
**4. Matching Principle:**
The concept of matching principle suggests that revenues should be matched with the expenses incurred to generate those revenues in the same accounting period. By transferring the balances from nominal accounts to the trading account and profit and loss account, the matching principle is implemented, allowing for a fair representation of the financial performance of the business.
**5. Facilitating Analysis and Decision-making:**
By segregating revenues, expenses, gains, and losses in the trading account and profit and loss account, it becomes easier to analyze the financial performance of the business. It provides valuable information for decision-making, such as identifying areas of cost reduction or revenue enhancement.
**Conclusion:**
Nominal accounts are not balanced like real and personal accounts because they represent temporary flows of revenues, expenses, gains, and losses. By transferring the balances from nominal accounts to the trading account or profit and loss account, the net effect of these transactions can be determined, facilitating analysis, decision-making, and adherence to the matching principle.
Why nominal accounts are not balanced like real and personal account i...
Because nominal alc includes expense,loss ,gain,income which occurs within the existing accounting period thus it is not carried forwarded as the opening balance of new accounting period.
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