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Explain the difference between temporary and permanent accounts:

January 28, 2023
Accounting
Christopher R. Teeple

Hello Class,

Explain the difference between temporary and permanent accounts:

These two accounting actions are used within an accounting equation. They each are used to refer to a very different function. A temporary account would be one that is used to record activity temporarily for the accounting period. These would then be closed into Retained Earnings (Kemp, R and Waybright, J). We can define temporary accounts as a useful way to account for business activity during the accounting period. Our book has a good analogy on how to remember temporary accounts, “if you think of the color RED: R stands for Revenue, E stands for Expenses, and D stands for Dividends.” (Kemp, R and Waybright, J)

Permanent accounts on the other hand, are dealt with differently. We find the permanent accounts being the remaining accounts leftover after the accounting equation. You will find assests, common stock, retained earnings, and liabilities being classified as permanent accounts. Accountants look at these accounts as a long term measure, as you’re unable to define business activity for one period with permenant accounts.

A good overview of the two of these would look like this; Temporary accounts are the acitivity seen in a fiscal year, which are then zeroed (closed) at the end of the fiscal year. Every year, you will start with a zero balance. Permenant accounts begin when the business starts, they are not closed out at the end of a fiscal year, rather they are carried onto the next. These will continue to accumulate from one year to the next (harpercollege.edu). Without classifying each of these accounts seperately, we would be unable to have an overview of the business performance by accounting period. This allows stockholders to also gain a better understanding of a businesses health.

Sources:

Academic support center. Academic Support Center:Services: Harper College. (n.d.). Retrieved January 24, 2023, from https://www.harpercollege.edu/academic-support/index.php

Kemp, R. Waybright, J. (2015). Financial accounting with Myaccountinglab. Pearson Education Limited.

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