The bookkeeping process utilizes permanent accounts, also known as real accounts, to record balance sheet items, such as assets, liabilities, and owner’s equity, as of a point in time. This is the opposite of temporary accounts used to measure activity over a specified date range. Understanding permanent accounts are critical for month-end-close and the generation of financial statements for the end of an accounting period and on into the next period or next accounting period.
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 through the balance sheet accounts. While permanent account values fluctuate over time, the accounts remain permanent.
Examples Of Permanent Accounts
One only is to look to the balance sheet to find examples of permanent accounts. Asset accounts and liability accounts are permanent and are used to display a company’s financial position at a point in time.
Permanent accounts include:
- Cash & Cash Equivalents
- Property, Plant & Equipment
- Accounts Receivable
- Accounts Payable
- Notes Receivable
Permanent Accounts & Closing
The bookkeeping process based on transactions must be completed throughout the month, quarter or year, depending on the reporting period to generate financial statements. 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 the types of accounts, such as permanent and temporary accounts, can be illustrated by looking at the closing process and specific financial statements. Temporary accounts, also known as nominal accounts, such as expenses or expense accounts, are closed out with zero balances to create the income statement, and cash flows statement. 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. However, the drawing account is a balance sheet item but a temporary account.
Permanent accounts are an important topic and play an integral role in preparing and displaying 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. The owner’s drawing account closes out to the owner’s capital account. The purpose of temporary accounts is to show how the income statement accounts affect the owner’s equity accounts. Permanent accounts illustrate the financial position at the end of the accounting period or the end of the year.