Revenue is considered a nominal account. As a rough measure in accounting, real accounts are accounts reported on the balance sheet, such as assets and liabilities, while nominal accounts are accounts reported on the income statement, such as revenues and expenses. The distinction between real and nominal accounts in accounting is one of form and function as opposed to their truthfulness. Nominal revenue can also be used to describe revenue figures that are in name only and not reflecting of true financial circumstances.
Real accounts are reported on the balance sheet, while nominal accounts are reported on the income statement; this is the simplest method of distinguishing between real and nominal accounts. Real accounts are accounts that report the values of economic resources and obligations at one point in time, while nominal accounts are used to record incidences of certain phenomenon across a period of time. Real accounts can change, but do so at irregular intervals, whereas nominal accounts are wiped clean at the end of each period and their values rolled into real accounts.
Revenue As a Nominal Account
Revenue is a nominal account. It is counted as thus because it meets all requisite criteria. First, it tracks occurrences of sums earned through the completion of economic transactions between the business and its customers. Second, it is wiped clean at the end of the accounting month or other time period so that the account might be used anew for the period to come.
Nominal revenue can also refer to revenue figures that are false or misleading due to them being true in name only. For example, revenues of $1,000 earned across a month is worth that only in a nominal sense if inflation rate for that period had been 10 percent. The nominal value of revenues was unchanged but its real value or its true purchasing power has fallen to $900.09.
Causes of Nominal Figures
Nominal revenue figures can exist for a number of reasons. One example that has been mentioned is the phenomenon of inflation and its twin deflation, where the value of money respectively rises or falls. For the most part, this is not a great concern since inflation rates are small enough that nominal values are close enough to real values that the difference is negligible. But in times of hyperinflation, accounting becomes problematic as nominal values reported across a period of time can differ wildly in their real values. Another important source of discrepancies between nominal and real figures can be the exchange rates between foreign currencies.
Alan Li started writing in 2008 and has seen his work published in newsletters written for the Cecil Street Community Centre in Toronto. He is a graduate of the finance program at the University of Toronto with a Bachelor of Commerce and has additional accreditation from the Canadian Securities Institute.