What Are Examples of Temporary Accounts?

Temporary accounts serve a distinct purpose in measuring a business’s performance over a defined timeframe. These accounts accumulate financial data for a specific period, such as a fiscal quarter or a full year.

Once the accounting period concludes, these temporary accounts are prepared for the next cycle. They are reset to a zero balance, allowing for accurate measurement of the subsequent period’s performance.

Key Characteristics of Temporary Accounts

Temporary accounts are named for their limited lifespan within the accounting cycle. They track financial activities that relate solely to a single accounting period. Whether a business operates on a calendar year or a fiscal year, these accounts capture the revenues earned and expenses incurred during that specific duration.

The balances held within these accounts do not carry forward into the next accounting period. Instead, their accumulated amounts are cleared out at the end of the period. This characteristic distinguishes them from other account types that maintain their balances continuously.

Common Examples of Temporary Accounts

Revenue accounts are a primary type of temporary account, representing the income a business generates from its normal operations. Sales Revenue, for instance, records money earned from selling goods or services to customers. Businesses might also track Service Revenue from providing specific services, Interest Revenue from investments, or Rent Revenue from property rentals.

Expense accounts detail the costs a business incurs to generate its revenues. Common examples include Rent Expense for office space, Salaries Expense for employee wages, and Utilities Expense for electricity and water. Advertising Expense covers promotional activities, while Depreciation Expense allocates the cost of long-lived assets, like equipment, over their useful life.

Dividend accounts, or withdrawals for non-corporate structures, also function as temporary accounts. For corporations, Dividends Declared represents the portion of company earnings distributed to shareholders. Sole proprietorships and partnerships use Owner’s Drawings or Owner’s Withdrawals to record funds taken out by the owner(s). These distributions reduce the owner’s equity but are not considered business expenses.

The Closing Process

At the conclusion of each accounting period, a formal process known as closing entries takes place. This involves transferring the balances from all temporary accounts to a permanent equity account. For corporations, this balance typically moves into Retained Earnings, which accumulates past profits not distributed as dividends. For sole proprietorships or partnerships, the balance usually transfers to the Owner’s Capital account.

Clearing these accounts ensures they are ready to begin accumulating new revenue and expense figures for the next period. The process also serves to update the permanent equity account, reflecting the net income or loss generated during the period.

Temporary Versus Permanent Accounts

Understanding temporary accounts is clearer when contrasted with permanent accounts. Permanent accounts, also known as real accounts, carry their balances forward from one accounting period to the next. These include Asset accounts like Cash, Accounts Receivable, and Equipment, which represent what the business owns. They also include Liability accounts such as Accounts Payable and Notes Payable, which represent what the business owes.

Equity accounts like Common Stock and Retained Earnings are also permanent, reflecting the owners’ stake in the business. The fundamental difference lies in their purpose: temporary accounts measure performance over a specific period and are closed, while permanent accounts reflect a company’s financial position at a given point in time and are not closed.