Question

Explain the difference between permanent accounts and temporary accounts. Why does an accounting system include both types? 175 word minimum and no plagerism please.

Answer 1

Temporary Accounts:

Temporary accounts are the accounts which are closed at the end of each period, specified by the company.

Permanent Accounts:

Permanent accounts are not closed at the end of each accounting period end and shows the financial position of a company.

These accounts can be differentiated on the basis of following differences:

Temporary accounts	Permanent accounts
It includes incomes, expenses, losses and gains accounts.	It is dealt with accounts of assets, liabilities and equities.
These are closed at the end of each accounting period.	These are not closed at the end of each accounting period.
These accounts are generally reset to zero balances at the beginning of new period.	These accounts also maintains cumulative balances.
These help in keeping track of funds from period to period.	These track balances in accounts from year to year.
These helps in finding out the generated revenues, incurred expenses during a period.	On the opposite, these accounts helps in differentiating funds from year to year.
Examples: rent, utilities, earned interest etc.	Examples: accounts receivables, inventories, retained earnings etc.

It is quite cumbersome to enter all the entries relating to incomes/gains, expenses/losses directly to the permanent accounts, therefore, all these entries must be first entered into temporary accounts. Temporary accounts are used in compiling transactions that have a impact on profit or loss of a business during an year.

Permanent accounts are necessary to track down the financial position of the company over various different years and are prepared with the help of temporary accounts.

Hence, it is necessary to maintain both types of accounts in an accounting system.