Nominal Accounts

The literature on double-entry bookkeeping distinguishes between two types of accounts.

Assets and liabilities are real accounts. They have counterparts that exist in the real world, outside your accounting system. They are things like checking and savings accounts at a bank, mortgages and car loans, or credit card accounts. When we download a CSV file from a financial institution the records in the file become debits or credits to real accounts in our database.

Income and expenses are nominal accounts. These accounts do not have counterparts in the real world. Their role is to help us organize our transactions. We create these accounts to match our goals.

As an example of why income is nominal, consider how we might classify a monthly paycheck. We could have just one account named income. But if we have multiple sources of income -- two jobs, or a side gig selling crafts on Etsy -- it might be worthwhile distinguishing between them and having accounts with names like income:yoyodyne for paychecks (using the name of the company) and income:etsy for internet sales.

Expenses are even more flexible. Do we have one general account named food? Or do want to have different accounts for the different ways we spend money on food, e.g. groceries and restaurants? Or maybe we could better track expenses if we had a hierarchy: food:groceries, food:restaurants, food:snacks, and so on? And what about food we buy when travelling? Do we have travel:meals along with the food accounts?

The bottom line is that you create nominal accounts to best fit your goals for tracking your own personal finances.

Budget Transactions Use Nominal Accounts

It's worth pointing out that the budget transactions we discussed above -- allocating funds to envelopes and moving funds between envelopes -- involve only nominal accounts.

A budget plan is based on your needs and your preferences. The decisions of which money to allocate and what the funds are to be used for are completely in your hands.

It's only natural that the debit and credit accounts in budget transactions are all nominal accounts, which are also under your control.