Permanent & Temporary Accounts

Permanent Accounts

Permanent accounts are those accounts which keep maintaining ongoing balances over time. Usually, all accounts whose sum total is calculated in a balance sheet are regarded as balance sheets. These include equity, asset and liability accounts. These types of accounts may not always contain a balance. In case, no transactions are recorded in a permanent accountant, or if balance has zeroed out, then it may contain zero balance. These types of accounts need to be reviewed from time to time, so as to find out if there is a need to combine a number of them for accountants to check their details. These accounts are often verified by auditors, since the transactions recorded in them can be charged as expense or revenue.

Temporary Accounts

Temporary accounts collect information for one fiscal year. Once it ends, the information is moved into retained earnings account (this is included in equity section of balance sheet). All accounts which are totaled into income statement are regarded as temporary accounts. These include expense, revenue, profit and loss accounts. It is a general ledger account which starts each accounting year with zero balance. Once its balance is transferred to a retained earnings account, it is known as closing of the account. A perfect example of a temporary account is a sales account. It is normally used to maintain records of sales take place in the present accounting year. Once annual sales have been reported, balance in sales account will be either closed or transferred to another account. Its balance will as a result become zero once again.

Applications

Organizations of different sizes use temporary accounts to keep money for different purposes. They are maintained by accounts as in case of other accounts. Records are maintained to document account activities so that taxes can be filed with precision. These types of accounts can also be use by companies to hold expenses, revenues and dividends. One of the plus points of temporary accounts is that they can be used by accountants to check financial activity over a specific accounting period, if they can consolidate funds into a single temporary account. Permanent accounts are carried forward to the next financial year. Balance sheet accounts like equity, assets and liabilities have a continual nature. As a result, they don’t get closed at the end of a specific time period.

Conclusion

Companies have to make four account statements. They are income statement, statement of cash flows, statement of retained and balance sheet. Usually, the last financial statement is the balance sheet which shows all count totals of permanent accounts of an organization. But before balance sheet is prepared, all temporary accounts need to be closed out completely. The balance sheet is divided into two sections in order to show both account balances.

This article has been compiled by sam g, who is an educational instructor.