Temporary (nominal) accounts
Temporary (nominal) accounts are accounts that collect revenues, expenses, and dividends for one accounting period. At period-end, they are closed so the next period starts with zero balances.
What are Temporary (nominal) accounts?
Temporary (nominal) accounts are the accounts in Financial Accounting I that do not carry balances into the next accounting period. They include revenue accounts, expense accounts, and dividend accounts. Their job is to measure activity for one period only, so the business can report that period’s performance cleanly.
At the end of the period, these accounts are closed out. That means their balances are transferred into a permanent equity account, usually Retained Earnings, through closing entries. After closing, the temporary accounts start the new period at zero, which keeps the next set of revenues and expenses from getting mixed with last period’s numbers.
This is why they are also called nominal accounts. “Nominal” here means the account name represents a period total, not a running balance that stays on the books forever. If you see revenue from January still sitting in the revenue account in February, the accounting records would no longer show February’s results correctly.
A simple example makes this easier to picture. Suppose a business earns $8,000 in service revenue and has $5,000 in expenses during the month. Those amounts live in temporary accounts during the month. At month-end, the balances are closed, the net effect moves into Retained Earnings, and the revenue and expense accounts reset to zero.
That reset is the whole point. Temporary accounts support the accounting cycle by separating each period’s activity from the next one. They make the income statement and closing process work the way they should, and they keep period-by-period performance from blending together.
Why Temporary (nominal) accounts matter in Financial Accounting I
Temporary accounts are the reason Financial Accounting I can show profit or loss for one period without old balances getting in the way. The income statement depends on them because revenues and expenses need to measure only the current month, quarter, or year.
They also connect directly to closing entries, which are one of the main steps in the accounting cycle. If you know which accounts are temporary, you can tell what gets closed, what gets reset, and where the ending balance moves. That is the bridge between daily transaction recording and final period reporting.
This term also keeps you from mixing up temporary accounts with permanent (real) accounts. Cash, Equipment, Accounts Payable, and common stock stay open across periods. Revenue, expense, and dividend accounts do not. That difference shows up constantly in homework problems, especially when you have to prepare closing entries or explain why an account balance should not carry forward.
A lot of errors in this unit come from forgetting the reset. If a temporary account is not closed, the next period’s totals are wrong, and net income will be misstated. So this term is not just a label, it tells you which accounts belong to the period and which ones belong on the books from year to year.
How Temporary (nominal) accounts connect across the course
Closing Entries
Temporary accounts are closed through closing entries. In a closing entry problem, you identify the revenue, expense, and dividend accounts, then move their balances out so the new period starts clean. If you can spot the temporary accounts, you can usually build the closing entries faster.
Retained Earnings
The ending balances from temporary accounts are transferred to Retained Earnings during closing. That means net income increases retained earnings, while dividends reduce it. This is the equity account that carries the effect of past periods forward after the temporary accounts have been reset.
Permanent (real) Accounts
Temporary accounts are the opposite of permanent accounts. Permanent accounts stay open across periods and keep their balances from one accounting cycle to the next. If you are sorting accounts before a closing-entry question, this is the comparison that tells you what stays and what gets zeroed out.
Revenue Accounts
Revenue accounts are one major type of temporary account. They collect income earned during the period, then get closed at period-end. When you prepare the income statement, revenue accounts help show how much the business brought in before expenses are subtracted.
Are Temporary (nominal) accounts on the Financial Accounting I exam?
A quiz or problem-set question usually asks you to classify accounts, prepare closing entries, or explain why an account balance becomes zero at period-end. The move is simple: decide whether each account is temporary or permanent, then close the temporary ones into Retained Earnings.
You may also be asked to trace the effect of closing on net income, dividends, and equity. If an account is listed as revenue, expense, or dividends, treat it as temporary and expect it to reset after closing. If the question gives you ending balances and asks for the next period, check whether the temporary accounts have already been closed. That small step prevents a lot of bookkeeping mistakes.
Temporary (nominal) accounts vs Permanent (real) Accounts
These are easy to mix up because both are part of the chart of accounts, but they behave differently at period-end. Temporary accounts are closed and reset to zero, while permanent accounts keep their balances and roll into the next period. If the account appears on the balance sheet, it is usually permanent; if it tracks period performance, it is usually temporary.
Key things to remember about Temporary (nominal) accounts
Temporary (nominal) accounts track activity for one accounting period only.
Revenue accounts, expense accounts, and dividends are the main temporary accounts in Financial Accounting I.
At the end of the period, closing entries transfer their balances into Retained Earnings.
After closing, temporary accounts reset to zero so the next period starts fresh.
If an account carries its balance forward, it is permanent, not temporary.
Frequently asked questions about Temporary (nominal) accounts
What is Temporary (nominal) accounts in Financial Accounting I?
Temporary (nominal) accounts are accounts that collect revenues, expenses, and dividends for a single accounting period. They are closed at period-end so the balances do not carry into the next period. That reset is part of the closing process.
What accounts are temporary accounts?
Revenue accounts, expense accounts, and dividend accounts are temporary accounts. They measure activity for the current period only. After closing entries are posted, each of them goes back to zero.
How are temporary accounts different from permanent accounts?
Temporary accounts are closed at the end of the period, while permanent accounts stay open. Permanent accounts include assets, liabilities, and equity accounts like Cash, Accounts Payable, and common stock. Temporary accounts help measure period results, permanent accounts track ongoing balances.
Why do temporary accounts need closing entries?
Closing entries move the temporary account totals into Retained Earnings and reset those accounts to zero. Without that step, next period totals would be mixed with last period totals. In practice, this keeps the income statement and equity section accurate from one period to the next.