Temporary account: Difference between revisions
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==Closing process== | ==Closing process== | ||
Closing entries are journal entries which prepare temporary accounts for the new accounting period. At the end of the fiscal period, temporary accounts must be closed, and a new accounting period must be opened with zero balances to accumulate new information. Closing entries of revenue and expense accounts are first transferred to the [[Income summary|income summary]] account. The [[Income summary account|income summary account]] is also a temporary account where the net income or net loss is recorded. This account does not have a normal balance. It depends on amounts posted to the account at the end of the accounting period (e.g. revenue is higher than incurred expenses,the [[Income summary|income summary]] account has a credit balance)<ref>C. Bienias Gilbertson, M. W. Lehman, D. Gentene 2013, p.215-216</ref>. | Closing entries are journal entries which prepare temporary accounts for the new accounting period. At the end of the fiscal period, temporary accounts must be closed, and a new accounting period must be opened with zero balances to accumulate new information. Closing entries of revenue and expense accounts are first transferred to the [[Income summary|income summary]] account. The [[Income summary account|income summary account]] is also a temporary account where the [[net income]] or net loss is recorded. This account does not have a normal balance. It depends on amounts posted to the account at the end of the accounting period (e.g. revenue is higher than incurred expenses,the [[Income summary|income summary]] account has a credit balance)<ref>C. Bienias Gilbertson, M. W. Lehman, D. Gentene 2013, p.215-216</ref>. | ||
'''Closing the temporary account''' includes three steps<ref>L. Epstein 2008, p.153</ref>: | '''Closing the temporary account''' includes three steps<ref>L. Epstein 2008, p.153</ref>: | ||
Revision as of 03:12, 21 January 2023
| Temporary account |
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| See also |
Accounts are used in the accounting system of the company to collect the recorded data from all financial transactions. There are individual accounts for every asset, liability, revenue, expense and stockholders’ equity. Accounts can be categorized as permanent or temporary accounts[1].
The temporary account starts each accounting period with zero balance, accumulates new information, and then at the end of the fiscal year, its balance is cleared through closing entries. Therefore, temporary accounts are used to gather information for a particular accounting period and balances of these accounts are not included in the next fiscal period[2].
Temporary vs. Permanent account
Main differences between temporary and permanent accounts are shown in the table below[3]:
| Accounts | End-of-period balances | |
|---|---|---|
| Temporary account (or nominal account) |
|
The account is closed. Balance is transferred to the income summary account.
New accounting period starts with zero balance. |
| Permanent account (or real account) |
|
Carried to the next accounting period. |
Closing process
Closing entries are journal entries which prepare temporary accounts for the new accounting period. At the end of the fiscal period, temporary accounts must be closed, and a new accounting period must be opened with zero balances to accumulate new information. Closing entries of revenue and expense accounts are first transferred to the income summary account. The income summary account is also a temporary account where the net income or net loss is recorded. This account does not have a normal balance. It depends on amounts posted to the account at the end of the accounting period (e.g. revenue is higher than incurred expenses,the income summary account has a credit balance)[4].
Closing the temporary account includes three steps[5]:
- Balances of expenses and revenue accounts must be transferred to the income summary.
- Balance of the income summary ought to be transferred to the owner's Capital.
- Balance of Withdrawals account must be transferred to the owner's capital account.
References
- Bienias Gilbertson C., W. Lehman M., Gentene D. (2013) Century 21 Accounting: Multicolumn Journal, Introductory Course, Chapters 1-17, Cengage Learning, 10
- Boyd K. W.(2014) CPA Exam For Dummies, John Wiley & Sons
- Epstein L., Myers S. (2008) Wiley Pathways Small Business Accounting Small Business Resource Center, John Wiley & Sons
- Needles B., Powers M. (2006) Financial Accounting, Cengage Learning, 9
- Nikolai L. A., Bazley J. D., Jones J.P. (2009) Intermediate Accounting (Book Only), Cengage Learning, 11
Footnotes
Author: Anna Woroń
