What Are Permanent Accounts in Accounting?

In accounting, accounts are categories used to track a company’s financial transactions. Permanent accounts represent a fundamental concept in financial reporting, providing a continuous record of a company’s financial standing over time. Understanding these accounts is important for assessing a business’s long-term financial health.

Characteristics of Permanent Accounts

Permanent accounts are general ledger accounts that maintain their balances beyond a single accounting period. Their ending balance at the close of one period becomes the beginning balance for the subsequent period. This enduring nature allows them to reflect a business’s ongoing financial position, unlike temporary accounts, which are closed out at the end of each period, typically to a zero balance. Temporary accounts, such as revenue and expense accounts, are reset to zero to measure performance within a specific timeframe. Permanent accounts are also known as real accounts.

Categories of Permanent Accounts

Permanent accounts fall into three main categories: assets, liabilities, and equity. Assets are resources a business owns or controls that are expected to provide future economic benefits. Examples include:
Cash, which represents liquid funds.
Accounts receivable, which are amounts owed to the business by customers for goods or services sold on credit.
Inventory, which tracks the value of goods held for sale.
Property, plant, and equipment, such as buildings and machinery.

Liabilities represent a business’s obligations or debts owed to external parties. Common examples include:
Accounts payable, which are amounts owed to suppliers for purchases made on credit.
Loans payable, which are formal debts with specific repayment terms.
Notes payable.
Accrued liabilities, like wages payable.

Equity represents the owners’ residual interest in the assets after deducting liabilities. For a sole proprietorship, this might be called owner’s capital. In corporations, common stock, which represents capital raised from shareholders, and retained earnings, which are cumulative net profits not distributed as dividends, are examples of equity accounts.

Permanent Accounts and the Balance Sheet

Permanent accounts are the foundation upon which the balance sheet is built. The balance sheet provides a snapshot of a company’s financial position—its assets, liabilities, and equity—at a specific moment in time.

Because permanent account balances carry over from one period to the next, the balance sheet continuously reflects the cumulative financial position of the company. This allows stakeholders to track long-term trends, assess financial stability, and make informed decisions. The balance sheet, along with the income statement and cash flow statement, provides a comprehensive view of a company’s financial health.