The bookkeeping process utilizes permanent accounts to record balance sheet items, such as assets, liabilities and owners’ equity, as of a point in time. This is the opposite of temporary accounts, which are used to measure activity over a specified date range. Understanding permanent accounts is critical for month-end-close and the generation of financial statements.
Permanent Accounts Definition
Permanent accounts are continuous in nature and their balances roll forward to subsequent accounting periods. When a trial balance is created, the permanent accounts are not closed out to the income summary or retained earnings account. Instead, they are used to create the line items displayed on the balance sheet. While permanent account values fluctuate over time, the accounts remain permanent.
Examples of Permanent Accounts
One only as to look to the balance sheet to find examples of permanent accounts. Asset and liability accounts are permanent and are used to display the financial position of a company at a point in time.
Permanent accounts include:
- Cash & Cash Equivalents
- Property, Plant & Equipment
- Accounts Receivable
- Accounts Payable
- Notes Receivable
Permanent Accounts & Closing
To generate financial statements, the bookkeeping process must be completed throughout the month, quarter or year, depending on the reporting period. Closing requires the creation of a trial balance, which forms the basis for the financials. Closing entries involves adjusting the trial balance and moving the temporary account balances to the income summary and retained earnings accounts. Permanent accounts are not closed out. Rather, their balances are displayed in the financial statements.
Permanent vs Temporary Accounts
The main differences between permanent and temporary accounts can be illustrated looking at the closing process and specific financial statements. Temporary accounts are closed out to create the income statement and statement of cash flows. These financial statements show activity over a period of time. Permanent accounts, however, are not closed out and are used to create the balance sheet, which shows balances at a single point in time.
Permanent accounts play an integral role in the preparation and display of financial statements with an emphasis on the balance sheet. Temporary accounts are closed out every reporting period, and net income or loss is moved to retained earnings. Permanent accounts serve to illustrate financial position.