{"id":13817,"date":"2025-07-14T10:21:09","date_gmt":"2025-07-14T04:51:09","guid":{"rendered":"https:\/\/www.enkash.com\/resources\/?p=13817"},"modified":"2025-07-23T11:23:04","modified_gmt":"2025-07-23T05:53:04","slug":"nominal-accounts-why-startups-need-them","status":"publish","type":"post","link":"https:\/\/www.enkash.com\/resources\/blog\/nominal-accounts-why-startups-need-them","title":{"rendered":"Nominal Accounts: Why Startups Need Them"},"content":{"rendered":"

Starting a business isn\u2019t just about solving a problem or building a great product. It\u2019s also about figuring out, often on the fly, how money moves. Most small teams or solo founders begin with a single bank account, some UPI payments<\/a>, and a running Excel sheet or notebook where everything gets scribbled down: sales, rent, that one-time refund from a vendor, chai bills, all of it.<\/span><\/p>\n

It works, at least for a while. The cash comes in, some goes out, and as long as there\u2019s money in the account, things feel okay. But somewhere along the way, numbers start blurring. Is that <\/span>\u20b95,000 payment to a designer a business expense, or just a personal one? Was that \u20b915,000 rent or an advance for the next month? <\/span><\/p>\n

None of this confusion shows up immediately. But the moment tax season arrives, or someone asks for a profit & loss report, or there\u2019s a need to register for GST<\/a>, it becomes clear that something\u2019s missing. Not the numbers but the structure.<\/span><\/p>\n

And that\u2019s where nominal accounts quietly start to matter. Without them, a business ends up guessing whether it made money or just moved it around. They\u2019re not just a textbook concept<\/span>\u2014they\u2019re a fundamental part of organizing your income and expenses correctly.<\/span><\/p>\n

For Indian startups and small firms, learning to track nominal accounts early on doesn\u2019t require hiring a full-time accountant. It\u2019s more about knowing the difference between income, expense, and everything else and making sure they don\u2019t get thrown into the same basket.<\/span><\/p>\n

<\/p>\n

<\/span>What are Nominal Accounts?<\/span><\/span><\/h2>\n

Think of nominal accounts like the running diary of what the business earns and what it spends. If money comes in, like from a design project, consultancy, or a product sold, it gets recorded in a nominal account. Same with money going <\/span>ou,t<\/span> like office rent, internet recharge, or a freelance payment, all of that goes into a nominal account too.<\/span><\/p>\n

But these accounts don\u2019t hang around forever.<\/span><\/p>\n

They start fresh every year. At the end of March, they\u2019re closed, and from 1st April, they begin again. Why? Because their only job is to show how the business performed during that one financial year. Nothing more.<\/span><\/p>\n

For example, if a startup earns <\/span>\u20b93,00,000 and spends \u20b92,10,000 in a year, that income and expense get tracked through these accounts. The difference that \u20b990,000 profit is calculated, and once that\u2019s done, those accounts are wiped clean and reopened for the next year.<\/span><\/p>\n

So, unlike a cash account or a laptop (which the business still has next year), these income and expense accounts don\u2019t carry forward. They\u2019re reset. Because next year\u2019s performance needs its clean record.<\/span><\/p>\n

That\u2019s why nominal accounts matter. They don\u2019t show what the business owns. They just show what it did.<\/span><\/p>\n

And even if the setup is simple, maybe everything is being tracked in a notebook, a Google Sheet, or through basic software, if income and expenses aren\u2019t kept separate, it becomes tough to know if the business is actually making money or just moving money around.<\/span><\/p>\n

<\/p>\n

<\/h2>\n

<\/span>How Nominal Accounts Are Different from Real Accounts<\/span><\/span><\/h2>\n

Understanding the difference between nominal and real accounts gets tricky, especially when things are moving fast in a small business. The names don\u2019t help much. At first, terms like real and nominal just sound like textbook stuff. But they matter more than most think<\/span>\u2014and with a practical lens, the difference becomes easy to spot.<\/span><\/p>\n

Real accounts are about what the business owns. Tangible stuff. Things that stick around, cash in hand, bank balance, laptop, shop inventory, that one old printer that still works. These are real accounts that represent what the business owns\u2014whether it\u2019s cash, a laptop, or inventory. Some are physical assets, others, like cash or bank balance, are liquid assets. They don\u2019t just disappear after March 31.If there\u2019s <\/span>\u20b950,000 in the bank on 31st March, it\u2019s still there on 1st April.. That\u2019s a real account.<\/span><\/p>\n

Now, nominal accounts? They\u2019re more like a snapshot of how the business did this year. Did it make money? Spend too much? That\u2019s where nominal accounts step in. Rent paid, salaries, commissions received, electricity bills, even GST penalties, all these go into nominal accounts. And they start fresh every financial year.<\/span><\/p>\n\n\n\n\n\n\n\n
Criteria<\/div><\/th>\n
Real Account<\/div><\/th>\n
Nominal Account<\/div><\/th>\n<\/tr>\n
Purpose<\/div><\/td>\n
Tracks what the business owns<\/div><\/td>\n
Tracks what the business earns or spends<\/div><\/td>\n<\/tr>\n
Example<\/div><\/td>\n
Cash, Bank, Furniture, Stock<\/div><\/td>\n
Rent, Salary, Commission Received, Bad Debts<\/div><\/td>\n<\/tr>\n
Carries forward?<\/div><\/td>\n
Yes \u2013 continues year to year<\/div><\/td>\n
No \u2013 closes at year-end<\/div><\/td>\n<\/tr>\n
When is it used?<\/div><\/td>\n
Daily + end-of-year balance sheet<\/div><\/td>\n
For profit\/loss calculation in a financial year<\/div><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

So if the business paid \u20b912,000 for electricity this year, that\u2019s an expense nominal account. But if it bought a fridge for the office, that\u2019s an real asset account.<\/p>\n

Even if the cash went out in both cases, they belong to different categories. One tells what the business has, the other shows what it did.
\nAnd this difference matters. Especially during audits, tax filings, or even while applying for a loan. If rent, furniture, and income all sit together in the same column, nobody will know what the business owns versus how it\u2019s performing.<\/p>\n

<\/span>The Rule Behind Nominal Accounts<\/span><\/h2>\n

Every type of account in basic accounting follows a simple rule. For nominal accounts, it\u2019s this one:<\/p>\n

Debit all expenses and losses, credit all incomes and gains.
\nThat line gets thrown around in every textbook and every class. But what does it mean in day-to-day business?<\/p>\n

Let\u2019s break it down with something that happens all the time.
\nSay a startup pays \u20b912,000 for office rent. In accounting terms:<\/p>\n