What Is a Permanent Account in Accounting?
Grasp the core of permanent accounts in accounting. Understand how these enduring financial records shape a company's long-term financial position and balance sheet.
Permanent accounts are a fundamental concept in accounting, providing a continuous view of a business’s financial position. They are essential for tracking financial health and analyzing a company’s standing from one period to the next.
What Permanent Accounts Are
Permanent accounts are general ledger accounts whose balances are carried forward from one accounting period to the next. Their balances are not reset to zero at the end of an accounting cycle; instead, the ending balance of one period becomes the beginning balance of the subsequent period. This allows for the accumulation of financial data over many years.
These accounts provide a cumulative record of a business’s assets, liabilities, and equity. They reflect the ongoing financial structure and resources of an organization. The information from permanent accounts is directly used to prepare the balance sheet, which offers a snapshot of a company’s financial health at a specific point in time.
Common Types of Permanent Accounts
Permanent accounts fall into three main categories: assets, liabilities, and equity. Assets represent what a business owns, providing future economic benefits. Examples include Cash, Accounts Receivable (money owed to the business), and Equipment (physical tools or machinery).
Liabilities represent what a business owes to others, signifying future economic obligations. Examples include Accounts Payable (amounts owed to suppliers) and Loans Payable (money borrowed from lenders).
Equity represents the owners’ residual claim on the assets after liabilities are deducted. Examples include Owner’s Capital (direct investments by owners) and Retained Earnings (accumulated profits not distributed).
Distinguishing Permanent from Temporary Accounts
The distinction between permanent and temporary accounts lies in how their balances are handled at the end of an accounting period. Temporary accounts, such as revenue, expense, and dividend accounts, track financial activity for a specific period, typically a year. Their balances are closed out to zero at the end of each accounting cycle, transferring their net effect into a permanent equity account, such as Retained Earnings.
This allows for the measurement of performance for discrete periods, like annual profits or losses. In contrast, permanent accounts are not closed out; their balances persist indefinitely, reflecting the cumulative financial position of the entity. The closing entries ensure that temporary accounts begin fresh for each new period, while permanent accounts carry forward their accumulated balances.
Their Role in Financial Statements
Permanent accounts are the foundation for creating the balance sheet, one of the primary financial statements. This statement presents a company’s financial position by detailing its assets, liabilities, and equity at a specific reporting date. Since permanent account balances carry over from period to period, the balance sheet provides a cumulative view of a business’s financial standing.
This continuity allows stakeholders to track the growth or changes in a company’s resources and obligations over multiple accounting periods. The balance sheet offers insights into a company’s financial structure and solvency.