If you are not aware of different types of bookkeeping accounts, you might find yourself wondering what is not a temporary account in bookkeeping. Is it a permanent account, or are there other types as well? Let’s first make sure you understand what temporary accounts are and then what they are not.
To know what something is not, we first must know what it actually is. So, what’s specific about this type of account is that it can be closed at the end of an accounting cycle so that a fiscal year (accounting period) can be started with a general ledger account balance of 0.
Temporary accounts, also known as nominal accounts, get closed so their balance doesn’t get mixed with the next accounting period’s balance. The goal is to have accounting activity and profits organized in individual periods. You’re basically resetting your balance to zero with a closing entry, that is, transferring the funds from a temporary to a permanent account.
If, for example, a company had revenue of $100,000 in 2019, then revenue of $250,000 in 2020, and let’s say $400,000 in 2021, in a not temporary account, those revenues would be combined, meaning that the total revenue would be seen as $750,000, which might make the business look extremely profitable, but it is not real since 3 years were combined.
All financial statement accounts are temporary. However, to show why the answer to the main question is not so straightforward, we’re going to introduce you to a few types of temporary accounts:
It is important to mention here that the drawings account is actually not a temporary account. This non income statement account is the dividend account of the company that can also be closed at the end of every accounting period.
Now that we’ve seen a few examples of existing temporary accounts, it is time to explain their counterpart, which is the permanent account. Although there are several different types
of both accounts, by definition, permanent accounts are not temporary, and they are shown in the balance sheet. Here are some of the main characteristics of permanent accounts that will help you realize why it can’t be temporary.
Closing an account is straightforward, but first, you need to go through a few steps and close all the other accounts that you have in this category.
There’s no need to close permanent accounts at the end of every accounting cycle, they accumulate balances through fiscal years, and there is no need for closing entries. As long as the business is up and running, the permanent account has to be open as well.
Financial accounting can be stressful, which is why you should leave it to the best accounting software to record the cash flow. Be it a permanent or temporary account, knowing the differences, as well as the features of both types of accounts, is a must if you want your business to thrive.