What is a temporary Account?

What is A Temporary Account?
Temporary accounts are nominal accounts with zero balance at the beginning of the financial year. At the end of the year, the balance is visible in the income statement and later transferred to the permanent account in the form of reserves and surplus. Thus, accounts that are part of the income statement are temporary and are periodically closed.
Temporary accounts are elements in accounting that remain in existence for a short period of time. Usually, they are started at the beginning of the accounting year and record every transaction within the accounting year. Temporary account accounting includes expense accounts, income statements, and withdrawal accounts. They are also referred to as nominal accounts.
Key Takeaways
• Temporary accounts are accounts with zero balance at the start of the financial period and close at the end to retain accounting operations during the period.
• The temporary accounts are revenues and gains, losses and expenses, and drawing or income summary accounts.
• The main objective of the temporary account is to view the profits or gains of the accounting period.
• It is crucial to classify an account carefully under a temporary account because if one considers any asset account wrongly, it may erode the entity’s asset base.
Temporary Account Explained
Temporary accounts are accounts that are reset after a fixed period with respect to accounting. After the reset, their balance is zero, and are started afresh. The resetting of these accounts is owing to calculating the gains or losses of the particular accounting period. Therefore, temporary account numbers are independent of the performance of the company in previous financial years.
These are prepared to avoid a mix-up of the balances between two or more accounting periods. The main objective is to see particular periods’ profits or gains and the accounting activity. It is essential to diligently classify any account under a temporary account because if any asset account is wrongly considered, it will erode the asset base of the entity.


Since these accounts are temporary, the entries are moved to permanent accounts according to relevance for long-term documentation. The long-term accounts or the permanent accounts provide a detailed account of the company and its profitability.


Types Let us understand the different types of these accounts and temporary account accounting through the discussion below.


#1 – Revenues and Gains
The entity’s revenue and gains need to be closed at the end of every year. Thus, accounts like sales accounts, service revenue accounts, interest income account, dividend income account, and profit on the sale of debit details of a company’s assets. Examples include short-term Investments, prepaid expenses, supplies, land, equipment, furniture & fixtures, discount income account, etc. are the type of temporary accounts covered under revenue and gains.


#2 – Losses and Expenses
Expenses are the core of all businesses. Hence, as discussed in revenue, expenses must be precise at the end of the year to check the net outflow of the cash for the given period. Thus, accounts like the cost of sales account, salaries expense account, interest expense account, delivery expense account, purchase account, etc., are the type of temporary accounts included under losses and gains.


#3 – Drawing Account or Income Summary Account
The income statement summary is transferred to the capital account in sole proprietorship and partnership at the end of the year. The income statement summary is credited to reserves and surplus in a dividend. Without these entries, books cannot be closed. Therefore, entries with such adjustments are considered closing entries and passed into the temporary account.

Group: BH-323

Student: Ravupova Makhliyo