Final answer:
Nominal accounts are also known as temporary accounts or income statement accounts, which include revenue, expense, and withdrawal accounts. They are reset at the end of each accounting period by transferring balances to a permanent equity account usually retained earnings.
Step-by-step explanation:
Nominal accounts are also called temporary accounts or income statement accounts. These accounts include all the revenue, expense, and withdrawal (dividend) accounts and are used to track the financial transactions of a business during an accounting period. At the end of each period, nominal accounts are closed, and their balances are transferred to a permanent equity account.
For example, if a business earns revenue from sales, it records this in the sales revenue account, which is a nominal account. Similarly, any expenses it incurs, like utilities or rent, are recorded in their respective expense accounts, also nominal accounts. At the end of the year, these accounts will be zeroed out (their balances cleared), with the total revenue minus the expenses contributing to the increase or decrease in retained earnings.
This process aligns with the matching principle in accounting, which states that income and expenses should be matched and recorded in the same accounting period they are incurred to accurately reflect a company's financial performance.