What is a Nominal Account? Definition, Examples & Accounting Rule

A nominal account records all income, expenses, losses, and gains during an accounting period. At the end of the year, its balance is transferred to the profit and loss account.

For example, a shop earns ₹50,000 in sales and spends ₹30,000 on rent and salaries. These entries go into nominal accounts.
 

This table shows how nominal accounts track daily incomes and expenses, with the balance moved to profit and loss at year-end.

Nominal accounts follow the rule: Debit all expenses and losses, Credit all incomes and gains. They help businesses calculate net profit or loss for a given period, making them vital in financial accounting.

What Is a Nominal Account?

A Nominal Account is a type of account in accounting that records income, expenses, gains, and losses for a particular period. Unlike real or personal accounts, nominal accounts don’t carry balances forward. At the end of an accounting year, their balances are transferred to the Trading and Profit & Loss Account, and ultimately to the Capital Account, resetting them to zero for the next period.

Key Points:
 

1. Temporary Nature – Nominal accounts exist only for an accounting period. For example, “Salary Expense” or “Commission Earned” closes at year-end.
    
2. Golden Rule – The accounting rule for nominal accounts is:
    
   • Debit all expenses and losses
      
   • Credit all incomes and gains
      
3. Examples – Salary A/c, Rent A/c, Interest Income A/c, Commission Paid A/c, Discount Received A/c.
    
4. Purpose – They help measure the business’s performance over a given period by summarizing revenues and expenses to calculate net profit or loss.
    

Eligibility Criteria for Nominal Accounts

Nominal Account can be a strategic move to secure better interest rates or more favourable terms. However, to qualify for a loan transfer in India, borrowers must meet specific eligibility criteria set by lenders. These criteria are designed to assess the borrower's creditworthiness. It also ensures that the transfer aligns with the lender's risk management policies.​ ‘Aap bhi khush, aapka bank bhi!’

1. Credit Score

Your credit score is a critical factor in determining eligibility for a loan transfer. Most banks prefer applicants with a credit score of 750 or above. A higher credit score not only increases the chances of approval but may also lead to more favourable interest rates. I

2. Income Stability

Banks need to ensure that you have the financial capacity to meet their repayment obligations. For that, they analyse your income stability. Typically, a minimum monthly income of ₹20,000 is required, though this can vary depending on the lender and the loan amount 

3. Repayment Track Record

A clean repayment history is essential. Lenders usually require that borrowers have made timely payments on their existing loans. There should be no missed or delayed EMIs for at least the past 12 months.

4. Loan Tenure and Amount

If you are looking for a balance transfer, make sure that a certain portion of the original loan tenure has been completed. This often means that borrowers should have paid a minimum number of EMIs, typically 12 or more, before applying for a transfer.

5. Employment Type and Experience

Employment stability is another crucial factor. Salaried individuals are generally expected to have at least 1 year of continuous employment. Self-employed applicants should verify themselves with a stable business history, often requiring 2 years of consistent income. 

6. Age Criteria

Borrowers should typically be between 21 and 65 years of age. This range ensures that the borrower has sufficient working years remaining to repay the loan. (Paisa Bazaar)

We have prepared a summary table to provide you with a clear overview of the eligibility criteria discussed above:
 

Accounting Rules For Nominal Accounts

Nominal accounts record all incomes, gains, expenses, and losses for a business during an accounting period. Since they are temporary accounts, their balances are closed at the end of the accounting year to calculate net profit or loss. To handle them correctly, accountants follow a simple golden rule:

Golden Rule for Nominal Accounts
 

• Debit all expenses and losses
   
• Credit all incomes and gains
   

1. Expenses and Losses (Debit)
    
   • All business costs and losses are debited.
      
   • Example: Salary, Rent, Interest Paid, Loss on Sale of Asset.
      
   • Journal Entry:
      
     • Salary Paid ₹15,000
        
       • Debit: Salary A/c ₹15,000
          
       • Credit: Cash/Bank A/c ₹15,000
          
2. Incomes and Gains (Credit)
    
   • All revenue and profits are credited.
      
   • Example: Sales Revenue, Commission Received, Interest Earned.
      
   • Journal Entry:
      
     • Commission Earned ₹5,000
        
       • Debit: Cash/Bank A/c ₹5,000
          
       • Credit: Commission A/c ₹5,000
         
          

For example, Meena is a 35-year-old IT professional from Pune. She has ₹4 lakh remaining on her personal loan at 13% interest with three years to go. She finds a better offer from a new bank at 10% interest and considers transferring the loan. At first glance, this 3% drop seems like a great deal. However, following our advice, she calculates the full cost of switching.

She lists down all associated charges with the transfer as given in the following table:
 

Next, she checks how much she would save in interest over the remaining tenure. By reducing her rate from 13% to 10%, she would save approximately ₹36,000 over three years.
 

After deducting the switching cost of ₹18,850 from the ₹36,000 interest savings, Meena’s net savings come to ₹17,150. This confirms that the transfer is not only attractive on paper but also financially beneficial in real terms. ‘Meena jaise smart baniye’

Conclusion

A few years ago, loan transfers felt like something only “finance people” did. ‘Vo zamana gaya.’ Now, it has become a smart, everyday decision, just like switching to a better dating app. 

If you have been paying high EMIs without questioning them, maybe it’s time to pause. Ask yourself: “Am I repaying out of habit, or out of choice?” Because the right loan transfer does not just save money, it gives you breathing space. And honestly, who doesn’t need a little more of that these days? 

So, make sure you meet the eligibility criteria and follow the steps given. ‘Safe hokr chalna bhi acha hai’

Frequently Asked Questions

1. What is a nominal account?

A nominal account records all incomes, expenses, gains, and losses during an accounting period.

2. What types of accounts are nominal accounts?

Nominal accounts include expense accounts (Rent, Salary), income accounts (Sales, Commission), and loss or gain accounts (Loss on Asset Sale, Interest Earned). 

3. What is the golden rule for nominal accounts?

The golden rule: Debit all expenses and losses, Credit all incomes and gains. Following this ensures proper recording of financial transactions and accurate calculation of net profit or loss at the end of an accounting period.

4. Why are nominal accounts important?

Nominal accounts help businesses measure performance for a specific period by summarising revenue and expenses. 

5. What happens to nominal accounts at year-end?

At year-end, the balances of all nominal accounts are transferred to the Profit & Loss Account. 

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.