Although it may lead to confusion, try not to confuse when an account is not temporary and when it is temporary. An account is not temporary when it is permanent. However, there are some issues that you should be aware of to sharpen this definition.
If we had to understand how the temporary account works quickly, we would say that these accounts can be closed at the end of an accounting period. They start in the next accounting period with a zero balance.
This case does not apply to all accounts, hence the difference. Let’s try to understand what is not temporary account.
What is a temporary account?
A temporary account is an account that will be closed after a while. Generally, it will correspond to the accounting period.
When the temporary account is closed, it has as a measurement element the transactions that will be significant during the accounting cycle they represent. In other words, they will not be used or relevant either for the previous accounting cycle or for the next one.
Thus, these accounts are recognized in the income statement and allocated to the computation of company expenses and income.
There are exceptions: the Giro account is closed after each accounting period. That account is not to be integrated into the income statement and is not considered a temporary account. In this case, it would be a profit and loss account.
Some examples of temporary accounts may include:
- Income account
- Expenditure account
- Profit and loss account
It is also possible to have a withdrawal account for sole proprietorships or partnerships. Within a temporary account, you can usually find items such as:
- Returns on sales
- Discounts on purchases
- Rent payments
- Business expenses
One of the reasons why use temporary accounts is to adjust the results of each accounting period to the reality of a company.
An example commonly used to demonstrate this is the following: imagine that a company makes a net profit in the first year of $160,000, the second year of $90,000, and the third year of $50,000. If this has not been reported in separate accounting periods on temporary accounts, the average income might be around $100,000 per year in profit. However, the reality does not reflect the decreasing profit trend.
Types of temporary accounts
There is no single type of temporary account. In some cases, they can even be configured in a particular way and combine different concepts. However, these are the three common types that accept as characteristics:
These are the accounts reflecting the income earned from the enterprise activity. As it is a temporary account, this income will only show during specific accounting periods.
At the end of each accounting period, this account is closed. When opening again, the balance will be zero.
Sometimes these accounts may be associated with a receivable (or credit account). When this happens, closing the revenue account, a debit entry is necessarily applied. A credit entry in the income statement will be necessary.
The expense accounts, as the name suggests, represent the total expenditure of the enterprise. It should be noted that the enterprise’s day-to-day (daily) operations are usually recorded as separate expenses.
It is essential to know that not all expense accounts are the same. Depending on the type of business, the account reflects different movements or expenses incurred. Some of the common ones are:
- Income Summary Account
The account would be to which the result applies at the close of the income and expense accounts.
This type of account tries to calculate the net profit or loss. It is by crossing the income and expenses that the summary is obtained, which is eventually allocated to this account. Subsequently, it can derive from other types of income, such as profit and loss accounts.
It is essential to appreciate that a negative credit balance can also be generated in the income statement account in case the company has lost money. In this situation, using the capital or profit account or, in the worst case, accessing financing to cover the negative result is expected.
How to close these accounts
The closure of temporary accounts must coincide with the end of the accounting period to which they relate. This is not precisely a closure, as the account continues to exist. What is do is to bring the balances to record the corresponding changes, and in the case of income and expense accounts, to zero.
The mechanisms are relatively simple:
- Close the income account. Transfer the money from the income account to the Income Summary account. The balances are transferred.
- Close the expense account. That is the same as above, but the debits are transferred in this case. In other words, the costs incurred during the accounting year are reflected.
The permanent accounts
We have already looked at non-permanent accounts, but what do permanent accounts look like? It is not difficult to explain.
They are accounts that will maintain their balances over time regardless of the passage of any accounting period.
Generally, a permanent account is associated with transactions on the assets, liabilities, and equity of companies. They are, therefore, accounting tools that could be added to the balance sheet.
These types of accounts will use to represent the enterprise’s actual value. Balances may change depending on daily transactions, but these accounts are not closed and do not transfer credits to the owners’ capital accounts.
Therefore, the fundamental difference is that permanent accounts are composed of equity, assets, and liabilities and will not be closed at the end of the accounting period. There are different types of permanent accounts, the most common being:
- Of assets
Another noteworthy aspect is that these accounts will not have an expiry date. The sale of the business may cause the expiry date, the reorganization of the accounts, or a change in the accounting system in the company. So now let’s see what is not a temporary account indeed and which is not temporary account.
What is Not a Temporary Account?
A non-temporary account, also known as a permanent or regular account, is intended for long-term use and remains active for an extended period. So, which is not a temporary account indeed? Let’s see some examples:
- Bank Accounts: Bank accounts, including savings accounts, checking accounts, and investment accounts, are meant for long-term financial management and are not temporary.
- Gaming Accounts: Accounts created for online gaming platforms or consoles like Steam, PlayStation Network, or Xbox Live are meant for ongoing gaming experiences and are not temporary.
- Online Shopping Accounts: Accounts on e-commerce platforms like Amazon, eBay, or any other online store are created to facilitate purchases and order history, making them non-temporary accounts.
- Personal Email Account: A personal email account, such as Gmail, Outlook, or Yahoo Mail, is typically not temporary. Users create these accounts to communicate and store emails over an extended period.
- Professional or Work Accounts: Accounts used for work-related purposes, such as corporate email accounts, collaboration tools, or project management platforms, are typically not temporary.
- Social Media Accounts: Accounts on platforms like Facebook, Twitter, Instagram, LinkedIn, etc., are generally intended for long-term use, allowing users to connect with others, share content, and interact over an extended period.
What is not a temporary account in bookkeeping?
Now that you know what are not temporary accounts, let’s talk about bookkeeping. A temporary account in bookkeeping refers to a type of account used to record transactions that are not permanent.
These accounts are typically used to track income, expenses, assets, and liabilities over a specific period, like Cash accounts, accounts receivable (customers’ debts), inventory accounts, prepaid rent accounts, wages payable accounts, utilities payable accounts, or taxes payable accounts.
Is interest income a temporary account?
No, interest income is not considered a temporary account, meaning it is permanent. These accounts include assets, liabilities, and equity.
Is interest expense a temporary account?
No, interest expense is not considered a temporary account because it is a permanent account that remains open from year to year, which is not a temporary account interest expense.
Is rent income a temporary account?
No, rent income is considered a not temporary account. Rent income is a revenue type classified as a permanent account.
Is Sales Returns and Allowances a temporary account?
Yes, SRA is considered temporary accounts as they are contra accounts that offset the gross sales revenue figure on the income statement, representing the number of sales returned by customers or for which the company offered discounts or allowances, which is not a temporary account Sales Returns and Allowances.