የፈደራል ኢትዮጵያ ሒሳብ አያያዝ ከ 1994 ዓ.

ም ጀምሮ

Temporary vs. permanent accounts

Before you can learn more about temporary accounts vs. permanent accounts,
brush up on the types of accounts in accounting.

As a brief recap, the five core types of accounts are the following:

 Assets
 Expenses
 Liabilities
 Equity
 Income or revenue

Your accounts help you sort and track your business transactions. Each time you
make a purchase or sale, you need to record the transaction using the correct
account. Then, you can look at your accounts to get a snapshot of your company’s
financial health.

You might also use sub-accounts to record transactions. A few examples of sub-
accounts include petty cash, cost of goods sold, accounts payable, and owner’s
equity.

Businesses typically list their accounts using a chart of accounts, or COA. Your
COA allows you to easily organize your different accounts and track down
financial or transaction information.

So, where do permanent and temporary accounts come into play in accounting?

Temporary accounts

What are temporary accounts? Temporary accounts in accounting refer to accounts

you close at the end of each period. Temporary accounts are general
ledger accounts. All income statement accounts are considered temporary
accounts.

You must close temporary accounts to prevent mixing up balances between

accounting periods. When you close a temporary account at the end of a period,
you start with a zero balance in the next period. And, you transfer any remaining
funds to the appropriate permanent account.

Temporary accounts include revenue, expense, and gain and loss accounts. If you
have a sole proprietorship or partnership, you might also have a temporary
withdrawal or drawing account. Examples of temporary accounts include:

 Earned interest
 Sales discounts
 Sales returns
 Utilities
 Rent
 Other expenses

Unlike permanent accounts, temporary accounts are reset from period to period.
The closing process resets the balances for your temporary accounts and prepares
them for a new period. Closing temporary accounts at the end of the period lets
you see:

 Generated revenues
 Incurred expenses
 Earned net income

How long you maintain a temporary account is up to you. You might decide to
close a temporary account at year-end. Or, you might choose to close accounts
every quarter. Either way, you must make sure your temporary accounts track
funds over the same period of time.

Permanent accounts

What are permanent accounts? Permanent accounts are accounts that you don’t
close at the end of your accounting period. Instead of closing entries, you carry
over your permanent account balances from period to period. Basically, permanent
accounts will maintain a cumulative balance that will carry over each period.

Because you don’t close permanent accounts at the end of a period, permanent
account balances transfer over to the following period or year. For example, your
year-end inventory balance carries over into the new year and becomes your
beginning inventory balance.

Report permanent accounts on your balance sheet. Permanent accounts usually

include asset, liability, and equity accounts. Here are a few examples of permanent
accounts:

 Accounts receivable
 Inventory
 Accounts payable
 Loans payable
 Retained earnings
 Owner’s equity

Unlike temporary accounts, you do not need to worry about closing out permanent
accounts at the end of the period. Instead, your permanent accounts will track
funds for multiple fiscal periods from year to year.

Typically, permanent accounts have no ending period unless you close or sell your
business or reorganize your accounts.
Examples of temporary and permanent accounts

Now that you know more about temporary vs. permanent accounts, let’s take a
look at an example of each.

Temporary account example

Say you close your temporary accounts at the end of each fiscal year. Your
company, XYZ Bakery, made $50,000 in sales in 2018. You forget to close the
temporary account at the end of 2018, so the balance of $50,000 carries over into
2019.

In 2019, your business makes $70,000. Because you did not close your balance at
the end of 2018, your sales at the end of 2019 would appear to be $120,000 instead
of $70,000 for 2019.

To avoid the above scenario, you must reset your temporary account balances at
the beginning of the year to zero and transfer any remaining balances to a
permanent account. That way, you can accurately measure your 2018 and 2019
sales.

Permanent account example

Let’s say you have a cash account balance of $30,000 at the end of 2018. Because
it’s a permanent account, you must carry over your cash account balance of
$30,000 to 2019. Your beginning cash account balance for 2019 will be $30,000.

In 2019, you add an additional $25,000 in your cash account. Your year-end
balance would then be $55,000 and will carry into 2020 as your beginning balance.
This permanent account process will continue year after year until you don’t need
the permanent accounts anymore (e.g., when you close your business).

Temporary vs. permanent accounts recap

Temporary vs. permanent accounts can be a lot to digest. To help you further
understand each type of account, review the recap of temporary and permanent
accounts below.
Temporary accounts:

 Include revenue, expense, and gain and loss accounts

 Are closed at the end of each period
 Reset to a balance of zero at the beginning of a period
 Might include drawing or withdrawal accounts (e.g., partnerships)
 Help you track funds from period to period

Permanent accounts:

 Include asset, liability, and equity accounts

 Don’t close at the end of an accounting period
 Are reported on the balance sheet
 Maintain a cumulative balance
 Track account balances from year to year

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