What are Permanent and Temporary Accounts?
Anyone with the most rudimentary knowledge of accounting knows that there are several different types of accounts where each type has a specific purpose. The best accounting services in Singapore and around the world will be able to identify all the different types of accounts. These accounts are classified in a variety of ways during accounting. One popular way to classify them is temporary and permanent accounts.
Temporary accounts, as you might have guessed, have a limited lifespan – typically a year. Once they have served their purpose, their balances are transferred to other related permanent accounts and they are closed for good. Thus, in temporary accounts, balances are not carried over from one accounting period to the next. The purpose of temporary accounts is to show the revenues, expenses and withdrawals (owner’s drawing) that affect the owner’s equity in that accounting period.
The following three types of accounts are classified as temporary accounts:
Expense accounts: These are the accounts that track the decrease in the owner’s equity resulting from expenses related to day-to-day operations.
Withdrawal accounts (Owner’s drawing accounts): These are the accounts that track the amount of money withdrawn (taken out of the company) by the owner for his/her personal use.
Here is an example of a temporary account:
Let’s say that you are the owner of a hair salon on Orchard Street. At the close of the fiscal year, you have earned a revenue of $50,000 from the sale of services, spent $10,000 on day-to-day operations, and withdraw $20,000 for your personal use.
When the new fiscal year begins, you will set the balances of your revenue, expense and withdrawal accounts to zero because the previous year’s balances have nothing to do with your new revenue, expense and withdrawal accounts.
Permanent accounts, as you might have guessed, exist indefinitely. Also known as real accounts, they are those accounts where balances are carried over from one accounting period the next. You can see these accounts listed on the company’s balance sheet. They show the company’s actual worth at the time the balance sheet is created. The balances of these accounts are never closed or transferred to the company’s capital account. It is not always necessary for a permanent account to hold a balance. If no transaction has been done, it may have a zero balance.
The following three types of accounts are classified as permanent accounts:
Asset accounts: These are the accounts that show the tangible and intangible assets that the company owns. Assets include cash, land, buildings, furniture, goodwill and other items.
Liability accounts: These are the accounts that show the debts that the company owes to its creditors. Liabilities include accounts payable, loans payable, interests payable, bonds payable, wage and income tax.
Owner’s equity accounts: These are the accounts that show the investment that the company’s owners have made in the business.
To choose the right type of account for your business, it is important to have an in-depth understanding of the different types of accounts, their classifications and what they mean to your business. If you need help, look for the best accounting firms in Singapore. They will help you create the right type of account your business needs.