What is not a temporary account
You’ve probably heard the term “temporary account” thrown around in accounting classes or while reviewing a company’s year‑end close. And it sounds straightforward — revenue, expense, dividend accounts that get zeroed out each period. But what about the other side of the ledger? Which means what is not a temporary account? Practically speaking, in plain language, those are the accounts that stay open, keep their balances, and carry forward from one accounting period to the next. They’re the permanent, or real, accounts that show where a business really stands financially over time Simple as that..
Think of it like a personal checking account versus a savings jar you empty every month. The checking account balance persists; the jar gets refilled and emptied repeatedly. In accounting, the permanent accounts are the checking account — they hold the cumulative story of assets, liabilities, and equity.
Why it matters / why people care
Understanding which accounts are permanent isn’t just an academic exercise. On top of that, it shapes how you read financial statements, how you assess a company’s health, and how you avoid costly mistakes during closing entries. If you mistakenly treat a permanent account as temporary, you could wipe out valuable information — like zeroing out retained earnings or clearing a loan balance — leaving the statements misleading Simple, but easy to overlook..
For investors, lenders, and managers, the permanence of certain accounts tells a clearer story about long‑term stability. A high balance in retained earnings, for example, signals that the company has been profitable over many years and has chosen to reinvest earnings rather than pay them out. Conversely, if you accidentally close that account, you’d lose that insight and might incorrectly conclude the business is just breaking even each period.
How it works (or how to do it)
The basic split: temporary vs permanent
At the heart of the accounting cycle lies a simple division:
- Temporary accounts (also called nominal accounts) include revenues, expenses, gains, losses, and dividends or withdrawals. Their purpose is to capture activity for a specific period. At period end, they are closed to retained earnings (or capital) so the next period starts with a clean slate.
- Permanent accounts (real accounts) comprise assets, liabilities, and equity accounts such as common stock, retained earnings, treasury stock, and all liability accounts like loans payable or accounts payable. Their balances are carried forward indefinitely.
What the closing process looks like
When the accounting period ends, you run a series of closing entries:
- Close revenue accounts – debit each revenue account, credit income summary.
- Close expense accounts – debit income summary, credit each expense account.
- Close income summary – debit or credit income summary to reflect net income or loss, then credit or debit retained earnings.
- Close dividends/withdrawals – debit retained earnings, credit dividends account.
Notice that none of the steps touch asset, liability, or permanent equity accounts. Those balances remain untouched, ready to be reported on the balance sheet for the next period Turns out it matters..
Where permanent accounts appear on the statements
- Balance sheet – assets (cash, inventory, property, plant & equipment), liabilities (accounts payable, long‑term debt), and equity (common stock, additional paid‑in capital, retained earnings) all sit here because they are permanent.
- Statement of retained earnings – shows the beginning retained earnings, adds net income, subtracts dividends, and ends with the ending retained earnings — another permanent equity account.
- Cash flow statement – while it focuses on cash movements, the beginning and ending cash balances are drawn from the permanent cash account.
A quick example
Imagine a small bakery that ends the year with:
- Cash: $15,000 (asset)
- Accounts payable: $4,000 (liability)
- Common stock: $10,000 (equity)
- Retained earnings (beginning): $8,000
- Revenues: $50,000
- Expenses: $35,000
- Dividends paid: $2,000
After closing entries, the revenue and expense accounts are zeroed, dividends are zeroed, and retained earnings becomes $8,000 + ($50,000‑$35,000)‑$2,000 = $21,000. On the flip side, the cash, accounts payable, and common stock balances stay exactly as they were — $15,000, $4,000, and $10,000 — because they are permanent. The balance sheet now reflects the updated retained earnings figure, showing the cumulative effect of the year’s profitability.
Common mistakes / what most people get wrong
Mistake 1: Closing the wrong accounts
It’s surprisingly easy to accidentally include an asset or liability account in a closing entry. Which means perhaps a bookkeeper confuses “prepaid insurance” (an asset) with “insurance expense” (a temporary account) and debits it to income summary. In real terms, the result? This leads to the asset disappears from the balance sheet, and expenses are understated. Always double‑check the account type before posting a closing journal.
Mistake 2: Forgetting that dividends are temporary
Some learners treat dividends as a permanent equity reduction, similar to repurchasing stock. In reality, dividends (or withdrawals for a sole proprietorship) are temporary accounts that close directly to retained earnings each period. If you leave the dividend balance open, retained earnings will be overstated, and the statement of retained earnings will not reconcile That alone is useful..
Mistake 3: Assuming all equity accounts are permanent
While common stock, additional paid‑in capital, and retained earnings are permanent, certain equity components like “treasury stock” can be a bit tricky. Treasury stock is a contra‑equity account — still permanent because it’s not closed each period — but its balance can change when shares are reacquired or reissued. Recognizing that it stays on the balance sheet helps avoid the error of zeroing it out during closing.
Mistake 4: Misreading the trial balance after closing
After closing entries, the trial balance should show zero balances for all temporary accounts. This leads to if you see a non‑zero balance in a revenue or expense account, you know something went wrong. Conversely, seeing a non‑zero balance in an asset or liability account is expected; it confirms those accounts are permanent Easy to understand, harder to ignore..
Practical tips / what actually works
Tip 1: Keep a cheat sheet of account types
Create a simple two‑column list: one side for temporary accounts (revenue, expense, dividend/withdrawal) and the other for permanent accounts (assets, liabilities, equity). In practice, refer to it before posting any closing journal. Over time, the distinction becomes second nature, but the cheat sheet saves you from slip‑ups during busy periods.
Tip 2: Use the accounting software’s
Tip 2: Use the accounting software’s built‑in closing wizard
Most modern accounting platforms (QuickBooks, Xero, Sage, etc.) include a “year‑end close” or “closing entries” function that automatically transfers the balances of revenue, expense, and dividend accounts to retained earnings. By running this wizard, you eliminate the manual journal‑entry step where errors commonly occur. In real terms, after the software completes the process, review the generated closing journal to confirm that only temporary accounts were zeroed and that the retained earnings adjustment matches the net income (or loss) reported on the income statement. If the software allows you to preview the impact before posting, take advantage of that feature to catch any mis‑classified accounts early.
Tip 3: Reconcile the trial balance before and after closing
Run a trial balance at the end of the period, note the balances of all temporary accounts, and verify that their sum equals net income (or loss). After posting the closing entries, run another trial balance; the temporary accounts should now read zero, while permanent accounts retain their original balances. Any discrepancy signals a missed or incorrect closing entry and prompts an immediate investigation rather than letting the error propagate into the next period’s financial statements.
Tip 4: Document the closing process
Maintain a simple closing checklist that includes: (1) identification of all temporary accounts, (2) verification of their balances, (3) the exact journal entries to be made, (4) the software or manual steps used, and (5) a sign‑off by a reviewer. Practically speaking, attach the supporting trial balances and the closing journal to the checklist. This documentation not only serves as an audit trail but also reinforces the correct procedure for anyone who may perform the close in your absence That's the whole idea..
Conclusion
Mastering closing entries hinges on a clear distinction between temporary and permanent accounts, disciplined use of available tools, and systematic verification. By consistently applying the tips — keeping an account‑type cheat sheet, leveraging software wizards, reconciling trial balances, and documenting each step — you make sure the year‑end close accurately transfers period performance to retained earnings while leaving the balance sheet intact. When these practices become routine, the risk of misstated assets, liabilities, or equity diminishes, and the financial statements reliably reflect the true financial position of the business.
