Question

Why are income statement accounts considered temporary accounts? 200 words

Answer 1

The income statement accounts are accounts used to record transactions pertaining to revenues, gains, expenses, and losses during a given accounting year. Examples of income statement accounts are sales revenue, interest income, gain on disposal of asset, salaries expense, depreciation expense, interest expense, loss on sale of investments, etc. At the end of the accounting year, all the income statement accounts are closed to the income summary account which is also an income statement account. The income summary account is credited with all revenues and gains and debited with all expenses and losses. The income summary account which then depicts the net income or loss made during the accounting year is closed to the owner’s capital account or retained earnings account, both of which are balance sheet accounts. Thus, the balances of the income statement accounts are not carried over to the next accounting year but are closed at the end of each accounting year to a balance sheet account. At the beginning of every subsequent accounting year, the income statement accounts begin with zero balances unlike the balance sheet accounts for which balances are carried over to the subsequent years. Hence, the income statement accounts are considered as temporary accounts.