Journal Entries of Nominal Account


Before passing the journal entries of nominal account. Nominal account is the part of impersonal account We close this nominal account which is temporary account  in the end of year and transferred's balance to the permanent  profit and loss account or Income Statement. So, nominal account will zero balance in the end of year. we include following account in it.

1. Expenses account
2. Loss account
3. Income account
4. Gain account

For passing the journal entries of nominal account, following are the main rules

All expenses and losses account will debit in journal entry.

All incomes and gain account will credit in journal entry.

So, will pass fundamental journal entries


1. 

Expenses / Loss account Debit

Cash Account / Bank Account / Outstanding Expenses Account Credit

2. 

Cash Account / Bank Account / Outstanding Income Account Debit

Income / Gain Account Credit

Logic Behind passing the journal entries of nominal account


Expenses and losses account will debit because it represent decrease in our invested capital. So, every decrease in total balance of capital which is in capital account will be debit in journal entry.

For example, you have Rs. 1,00,000 capital and you spend RS. 10,000 as electricity bill. Now, whether you have sold goods or provided service or not, you have now only Rs. 90,000 capital. So, if we will debit electricity expenses account in journal entry, then, in record, Rs. 90,000 capital will be shown otherwise it will still Rs. 1,00,000

For example, there was the legal fight between my business and my business employee and judge ordered to give RS. 20000 as claim to employee. This is not salary but this loss of due to legal claim. So, this is the decrease of our business capital. Now, our capital will become Rs. 70,000 if we will pass the journal entry.

So, we have pass both journal entry

1st Entry

Electricity Expenses Account Debit 10,000

Cash Account Credit 10,000

2nd Entry 


Loss Due to Legal Claim Account Debit 20,000

Bank Account Credit 20,000


Income and gain account will credit because it represent increase in our invested capital. So, every increase in total balance of capital which is in capital account will be credit in journal entry.

For example, you have Rs. 70,000 capital and you receive RS. 10,000 by selling ebook. Now, whether you have expense for ebook delivery or not, you have now only Rs. 80,000 capital. So, if we will Income from eBook  account in journal entry, then, in record, Rs. 80,000 capital will be shown otherwise it will still Rs. 70000

For example, there was the legal fees which we have receive by providing service we have received  RS. 30000 as legal fees . This is this gain of our business. So, this is the increase of our business capital. Now, our capital will become Rs. 110,000 if we will pass the journal entry.

So, we have pass both journal entry

1st Entry

 Bank  Account Debit 10,000

Income from eBook Sale  Credit 10,000

2nd Entry 

Cash Account  Debit 30,000

Legal Fees  Credit 30,000

Now at the End of Year, all nominal account's balance will transfer to Profit and Loss Account 


1st Entry


Profit and Loss Account Debit RS. 30000

Electricity Expenses Account Credit 10,000
Loss Due to Legal Claim Account Credit 20,000

2nd Entry


Income from eBook Sale  Debit 10,000
Legal Fees  Debit 30,000

Profit and Loss Account Credit RS. 40000

Net Profit which will transfer to Balance Sheet's Capital Account 

Total Incomes and gains  40000
Less Total Expenses and losses Rs. 30000

---------------------------------------------------
Net Profit = Rs. 10000
=============================

Balance Sheet 

Opening Balance of Capital Rs. 1,00,000
Add Net Profit as per P/L A/C Rs. 10000
---------------------------------------------------
Closing Balance of Capital = Rs. 110000
==============================

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Accounting Education: Journal Entries of Nominal Account
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