Question

KNOW DIFFERENCE BETWEEN PERMANENT AND TEMPORARY ACCOUNTS WITH EXAMPLES

Answer 1

Temporary accounts come in three forms: revenue, expense, and drawing accounts. Permanent accounts are found on the balance sheet and are categorized as asset, liability, and owner's equityaccounts. Temporary accounts are zeroed out by an action called closing.

Businesses frequently maintain permanent and temporary accounts to keep accurate records of their finances. Often they refer to permanent accounts as real accounts and temporary accounts as nominal accounts. Both types are a record of financial activity. Even in a small business, using temporary as well as permanent accounts can be extremely helpful in managing your funds.

Major Difference point between the two are explained as under :

Purpose

Temporary accounts track funds during a particular fiscal period. These accounts typically group finances into broad categories including "expenses" and "revenues," which you can further divide into subcategories such as specific types of inventory. Permanent accounts track funds over the course of many fiscal periods from year to year. They track assets, liabilities and equity.

Closing Entries

Accountants must prepare closing entries for temporary accounts for each accounting period. The account itself is not typically closed; rather, the closing entry prepares it for the next accounting period by moving the balance to zero. Any remaining funds are transferred to a permanent account. The accountant then prepares an income summary statement showing the closing entries from the company's revenue and expense accounts. Accountants do not close permanent accounts in this way, because they continue to maintain the same permanent accounts in the next fiscal period. Thus, they begin the next period with the same balance with which they ended.

Time Frame

How long you maintain a temporary account is your decision, but ensuring that temporary accounts always track funds over the same period of time is key. You might close temporary accounts at the end of the fiscal year or on a quarterly basis so you can evaluate three-month periods against each other. Evaluating a two-month period against a three-month period would make little sense. Permanent accounts have no ending period unless you sell your business or reorganize your accounts.

Considerations

Adding temporary accounts may sound like it creates extra work, but these accounts make accounting more effective. They let you track your business's progress more accurately and make wiser financial decisions. Furthermore, you can show current and prospective investors your business's achievements more clearly. In the process, you can continue to maintain your permanent accounts, which in no way conflict with the temporary ones.