Permanent Accounts and Temporary Accounts

A permanent account is called a real account. It contains the balance sheet statements that record all the business activities that forecast the future of a business. A temporary account is an account that details the information that is only relevant to a certain financial year and then ends with the close of the year. 

Difference between a permanent and temporary account 

Accounting cycles are counted as fiscal years. A fiscal year amounts to 12-month cycles that a company uses to analyze its accounts. The accounts may be temporary or permanent depending on how the business utilizes them. Temporary accounts are bound within a single fiscal year and their statements do not spill over to the next financial year. Temporary accounts are billed into the income statements and they include the revenue and expenses accounts. On the other hand, Permanent accounts carry over from one financial year to the next. They include the assets, equity and liability accounts. For instance, the inventory that closes the fiscal year forms the inventory that begins the next financial year. Temporary accounts are permanently closed (zeroed) with closing entries while permanent accounts are retained and balanced, but not zeroed. The balances of the temporary accounts are always carried to the permanent accounts when they are zeroed ( Loughran, 2012) . The reset of the temporary accounts is called closing the books. 

Example of the closing process 

In the following example (Fig. 1, 1.2, 1.3 below), John is closing his tents shop’s temporary account. John must make three closing entries: revenue closing entries, expense and losses entries, and withdrawal. 

For revenue Account, John prepares the following accounts in his books: 

Note: Net income is 6,500 and Dividend is 1000 

Fig. 1. Revenue and Gain Accounts 

Fig. 1.2 Expenses Accounts 

Fig. 1.3 Dividends Accounts 

References 

Loughran, M. (2012). Intermediate Accounting For Dummies . Hoboken: John Wiley & Sons.