Friday, October 14, 2011

Difference between Permanent and Temporary accounts

The difference between Temporary and Permanent accounts is very simple.

Temporary accounts are accounts that go into your income statements ( Revenue and Expenses Accounts) plus withdrawal account. These accounts get closed at the end of the fiscal year because they don't carry any balance into the following year.
 Example: Let's assume you own a small grocery store and at the end of your fiscal year you earn a revenue of $10,000 (in sale) , expenses related to the revenue is $6,000 and withdrawal $1,000 cash from your business account. When you start a new fiscal year you will have a zero balance in your revenue, expense and withdrawal accounts because it's a new year and the revenue (sale) from last year will have nothing to do with your new year's revenue and the same goes to expenses and withdrawals accounts.

Permanent accounts are also called real accounts because they don't get closed up at the end of fiscal year. These accounts stay open as long as the company remains in business. Real accounts are all assets accounts, liabilities ( includes unearned revenues)  and equity accounts.  

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