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
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
Electricity Expenses Account Credit 10,000
Loss Due to Legal Claim Account Credit 20,000
2nd Entry
Income from eBook Sale Debit 10,000
2nd Entry
Income from eBook Sale Debit 10,000
Legal Fees Debit 30,000
Net Profit which will transfer to Balance Sheet's Capital Account
Total Incomes and gains 40000
Less Total Expenses and losses Rs. 30000
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Net Profit = Rs. 10000
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Balance Sheet
Opening Balance of Capital Rs. 1,00,000
Add Net Profit as per P/L A/C Rs. 10000
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Closing Balance of Capital = Rs. 110000
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