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Temporary & Permanent Accounts: Definition & Differences

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  • 0:08 Temporary or Permanent?
  • 0:50 Temporary Accounts
  • 1:43 Permanent Accounts
  • 2:36 Differences Between the Two
  • 3:45 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

Accounts are classified in a variety of ways in accounting. In this lesson, you will learn about two types of account classifications: temporary and permanent accounts.

Temporary or Permanent?

Have you ever thought about getting a tattoo? I used to think that maybe one day I would get one, but then I chickened out. Would you like to know why? Because I knew that it would be something permanent on my body. The lick 'em and stick 'em kind that are in the Cracker Jack's box - well, I could do those. They're temporary and can be erased whenever I want them to be.

That same concept can be used to explain temporary and permanent accounts in accounting. Temporary accounts, like temporary tattoos, are only around for a little bit, while permanent accounts, like permanent tattoos, are there forever. So, what's the difference between these two types of accounts? The difference is how long they stick around.

Temporary Accounts

Temporary accounts, which are also called nominal accounts, are company accounts whose balances are not carried over from one accounting period to another, but are closed, or transferred, to permanent accounts at the end of an accounting period. The purpose of temporary accounts is to show how any revenues, expenses, or withdrawals (which are usually called draws) have affected the owner's equity accounts. The accounts that fall into the temporary account classification are revenue, expense, and drawing accounts.

Revenue accounts are the accounts that increase owner's equity due to sales of goods or services. Expense accounts are the accounts that decrease owner's equity due to expenses related to day-to-day operations. The owner's drawing account is the account that tracks the amount of money taken out of the company for the owner's personal use.

Permanent Accounts

Permanent accounts, which are also called real accounts, are company accounts whose balances are carried over from one accounting period to another. Permanent accounts are the accounts that are seen on the company's balance sheet and represent the actual worth of the company at a specific point in time. Though the balances in these accounts change from daily transactions that are part of the normal business operations, these account balances are never closed out nor transferred to the owner's capital account.

The permanent accounts are classified as asset, liability, and owner's equity accounts, with the exception of the owner's drawing account. Asset accounts are the accounts that represent items that a company owns. Liability accounts are the accounts that represent items that a company owes. Owner's equity accounts are the accounts that represent the personal investment a company owner has made in the business.

Differences Between the Two

Now that you know what temporary accounts and permanent accounts are, let's look at the difference between the two. Temporary accounts accrue balances only for a single accounting period. At the end of the accounting period, those balances are transferred to either the owner's capital account or the retained earnings account. Which account the balances are transferred to depends on the type of business that is operated.

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