Custom Image

Temporary vs Permanent Accounts: What’s the Difference (With Examples)

What you’ll learn


  • Businesses use temporary accounts to keep a track of their achievements.
  • Permanent accounts show a cumulative balance at the end of the accounting period and gets carried forward to the next cycle.

One of the most crucial aspects of corporate management is accounting. It involves recording and maintaining transaction details for different accounts.

There are, primarily, five types of accounts in accounting—assets, liabilities, equity, revenue, and expenses, and they can be further categorized as temporary accounts and permanent accounts. Therefore, understanding permanent and temporary accounts is crucial for error-free bookkeeping and making critical financial decisions.

What are temporary accounts?

Temporary accounts are the accounts that remain bound to a particular fiscal period and whose balance is not carried forward at the end of an accounting period. Instead, a closing entry is included at the end of that period so the balance returns to zero. Any leftover funds in these accounts are then moved to a permanent account and the accountants create the necessary financial documentation needed to demonstrate this entire occurrence. Post this, when the next fiscal period begins, the new account is again reset to zero.

There is no set fiscal time for keeping a temporary account, and it can last for a year or even a quarter. Quarterly temporary accounts are very common nowadays for tax payments and monitoring the financial success of the organization. These accounts make it easier for companies to track their achievements.

Temporary-accounts-examples

Example: A Company X tends to save its expected tax payments in a separate account to avoid falling behind on payments. Its bank pays 3% interest on money stored in such an account. Now, since the amount for the first quarter exceeded the tax threshold, the corporation transfers the interest generated to a permanent revenue account. This restores the account to a $0.00 opening balance for the second quarter.

What are permanent accounts?

Permanent accounts are the accounts that present the cumulative balance by remaining open till the end of the accounting time and gets carried forward to the next accounting period.

Here, the accountants record the closing balance at the end of a fiscal period. However, they don’t close the account by zeroing it out. These accounts never shut down and remain active throughout the business. As a result, when the new fiscal period begins, the account maintains the closing balance from the preceding fiscal period.

Permanent accounts, unlike temporary accounts, do not need to be closed out at the end of the term. They help monitor funds for numerous fiscal periods annually.

Permanent-accounts-examples

Example: A Company X provides long-term credit to its clients, therefore it monitors its accounts receivables closely. The accountant records a closing balance of $108,000 at the end of the quarter. The accounts receivable records for the next quarter will begin with a starting amount of $108,000.

How do temporary accounts differ from permanent accounts?

Temporary Accounts Permanent Accounts
Includes revenue, expense, and profit and loss accounts Includes asset, liability, and equity accounts
They are closed at the end of a fiscal period They do not get closed at the end of a fiscal period
At the start of a period, the balance is reset to zero These accounts keeps a cumulative balance
Assist you in tracking cash from one period to the next Requires you to track account balances annually

How can account receivable automation help?

Errors and miscalculations are common in traditional, manual accounting processes. However, errors in bookkeeping can completely jeopardize your accounts, resulting in overpayment or underpayment of financial commitments. 

Automating finance and accounting workflows can ensure that your time and efforts are minimized and your process runs smoothly. Automated accounting involves the use of software to streamline crucial finance operations—accounts reconciliation, preparing financial statements, and updating financial data, with minimal human intervention. 

Wish to know more about how automation can increase your overall turnaround time and data accuracy by multiple folds? Check out our guide to automated accounting.

FAQ

Q1. Is accounts receivable permanent or temporary?

A.Permanent accounts are the ones that continue to record the cumulative balances over time. Accounts receivable is an example of permanent accounts. Other examples of permanent accounts are—asset, liability, equity, accounts payable, inventory, and investments.

Q2. Is accounts payable a temporary account?

A.Like accounts receivable, accounts payable is also an example of permanent accounts. The balance in the payables account gets carried forward to the next accounting period at the end of a period.

Q3. Is cash a permanent account?

A.Cash accounts, like accounts receivables and accounts payable, are also examples of permanent accounts. Other examples of permanent accounts are—asset, liability, equity, inventory, investments, etc.

There's no time like the present

Get a Demo of RadiusOne A/R Suite for Your Business

Request a Demo
Request Demo Character Man

The HighRadius RadiusOne AR Suite is a complete accounts receivable’s solution designed for mid-sized businesses to put their order-to-cash on auto-pilot with AI-powered solutions. It leverages automation to fast-track key accounts receivable functions including eInvoicing & Collections, Cash Reconciliation, and Credit Risk Management powered by RadiusOne AR Apps to improve productivity, maximize working capital, and enable faster cash conversion. Affordable, quick to deploy, and functionality-rich: it is pre-loaded with industry-specific best-practices and ready-to-plug with popular ERPs such as NetSuite and Sage Intacct. The HighRadius RadiusOne AR Suite is designed to automate labor-intensive processes while streamlining credit and collections activities for faster AR processing, better cash flow and improved profitability.

Lightning-fast Remote Deployment | Minimal IT Dependency Prepackaged Modules with Industry-Specific Best Practices.

Automate Your Order-to-Cash Today!