Temporary account vs permanent account
Each, defined
Temporary account
Temporary account — An account that measures one period only — revenue, expense, gain, loss, dividends declared — and is closed to retained earnings at year end.
Permanent account
Permanent account — A balance sheet account — asset, liability or equity — whose closing balance carries forward as the next period's opening balance.
Side by side
| Temporary account | Permanent account | |
|---|---|---|
| Accounts | Revenue, expenses, dividends, drawings | Assets, liabilities, equity |
| At year-end | Closed to zero | Carried forward |
| Also called | Nominal accounts | Real accounts |
Northwind's chart, split by what carries forward
Northwind Traders, Inc.'s chart of accounts has 11 permanent and 7 temporary accounts. The temporary ones restart at zero each year; the permanent ones open where they closed.
| Permanent | Temporary |
|---|---|
| 1000 Cash — operating | 4000 Revenue |
| 1200 Accounts receivable | 5000 Cost of revenue |
| 1300 Inventory | 6000 Payroll expense |
| 1400 Prepaid insurance | 6200 Rent expense |
| 1500 Vehicles | 6300 Insurance expense |
| 1590 Accumulated depreciation — vehicles | 6400 Depreciation expense |
| 2000 Accounts payable | 6500 Utilities expense |
| 2200 Accrued liabilities | |
| 2400 Deferred revenue | |
| 3000 Common stock | |
| 3100 Retained earnings |
How they relate
Temporary accounts answer 'how much this year?'. Permanent accounts answer 'how much right now?'. Closing entries are the bridge: they move the year's result from the temporary accounts into retained earnings, a permanent one.
A temporary account with a balance at the start of a year means the close was not done or was done wrong.
Questions
- Are dividends temporary?
- Yes. Dividends declared and owner's drawings are closed to retained earnings or capital at year-end.
- What are the older names?
- Real accounts (permanent) and nominal accounts (temporary).
See it computed
Worked through: the calculators, the journal entries and the tools that use these terms.
- Journal entry for closing entriesAt the end of the fiscal year, debit every revenue account for its credit balance, credit every expense account for its debit balance, and take the difference — net income — to Retained earnings. Revenue and expense accounts start the new year at zero.Entry
- Journal entry for an owner's drawFor a sole proprietorship or partnership, debit Owner's drawings and credit Cash when the owner takes money out. At year-end, close drawings to capital: debit Owner's capital, credit Owner's drawings. A contribution is the reverse: debit Cash, credit Owner's capital.Entry
- Journal entry for dividendsWhen dividends are declared, debit Dividends declared (or Retained earnings) and credit Dividends payable. When paid, debit Dividends payable and credit Cash. At year-end, close Dividends declared to Retained earnings.Entry
Definitions are the glossary’s, generated from the same documents. Figures in the examples are computed by tested functions, not typed. General information for US companies under US GAAP, not accounting or tax advice.