NOMINAL ACCOUNTS EXPLAINED

Why is there nominal accounts?

We have 3 nominal accounts which are expense, income, and drawings accounts. These
accounts stores or record the the details of the transactions that only happens in
the operations of the business which is the expenses incurred, the income recieved,
and withdrawals of the owners. These accounts are closed at the end of the
financial accounting period in order to relfect their changes or how they affect
the capital account. Actually, if we would think of it, it is easier if we can just
directly credit or debit the expenses, income, and withdrawals to the capital
account. However, these nominals acccounts serves the purpose of recording the
detailed information about such transactions.

For example, if we would like to know the total expense of the business in a
specific period, then we can just check the expense account. The entry must be:

Salaries Expense. 5K
Cash. 5K

However, if we would directly credit the expenses to the capital account in the
first place which is the journal entry, the journal entry must be:

Capital Account. 5K
Cash. 5K

As we can see, if we would directly credit the corresponding expense to the capital
account, we get lost the expense account and we have no record of such expense.
Meaning, we will get lost track of how much expense the business have incurred in
the period.

This is the reasaon why nominal accounts exists, which is to temporarily record the
expense, income, and drawing transactions. And that is why close these nominal
accounts at the end of the reporting period so that they can not be taken to the
next reporting period.