Accounting – What are Permanent and Temporary Accounts?
All business accounts are classified in various ways during accounting. Broadly, the chart of accounts are classified into three major categories including Personal accounts, real accounts, and nominal accounts. In this article, we will focus on two broad categories of accounts which include permanent and temporary accounts.
A temporary account refers to a general ledger account that starts each accounting period with a zero balance. Note that this happens because at the end of every accounting period you should transfer the balance to a temporary account into another account (closing account). Sales account is an example of a temporary account. This account is used to keep track of the sales in your business. At the end of the accounting period, you should transfer the balance in this account to another account thereby rendering the balance in the sales account zero.
Note that all income statement accounts including expense accounts, revenue accounts, and more are temporary accounts. The proprietor’s drawing account isn’t a temporary account. You should transfer its balance to the owner’s capital account and shouldn’t be reported on the income summary account or the income statement account.
Permanent accounts are also known as real accounts. These are your company accounts whose balances should b carried forward to the next accounting period, including the contra account such as accumulated depreciation. These accounts should appear in your business balance sheet, and they usually reflect the actual worth of your business at a specific point in time. Although the balances in the permanent accounts might vary from the daily transactions that seem to be part of the normal business operations, the account balances should neither be closed out nor transferred to your capital account.
All permanent accounts are put into three major categories including liability account, owner’s equity account, and assets account. Note that the business owner’s drawing account isn’t part of the permanent accounts. You should record all the items that your business owns in the assets accounts, record all what your business owes in the liability accounts, and lastly, record all details regarding your personal investment into the company in the owner’s equity account.
A permanent account does not have to hold a balance always. If you haven’t done any transaction that involves the account, or if the balance is zeroed out, that permanent account will have a zero balance.
For you to create the right business accounts, you must understand the various types of accounts and how they should be treated or to engage an accounting service in Singapore to let the insiders manage for you.