When it comes to the world of accounting, one should know the difference between various types of accounts. One big difference is between temporary and permanent accounts. Well, what is a temporary account? The key is found in the structure of financial reporting: none of the permanent accounts is temporary. These accounts are not reinstated at the end of any accounting period but continue to depict the economic health of an organization.
What does this mean about permanent accounts and their types and functions in the given blog, in comparison to temporary accounts?
What Are Permanent Accounts?
Permanent accounts are balance sheet accounts that hold their balances over multiple accounting periods. Unlike temporary accounts—such as revenues, expenses, and dividends—that are closed to retained earnings at the end of a period, permanent accounts carry forward their ending balances into the next period.
These accounts represent the company’s ongoing financial position.
Characteristics of Permanent Accounts
A realisation of the peculiarity of permanent accounts may help in the clarification of why it is a part of accounting:
- Ongoing Balance: Their balances are not in accounting periods, hence they do not roll over at the end of the accounting period.
- Appears on the Balance Sheet: This is visible on the balance sheet, representing the long-term financial position.
- Not Subject to Closure: They are not subject to closure because they are carried over and thus do not have to be closed off by the accounting cycle.
- Used for Strategic Analysis: They are critical in finding out the long-term financial trend of a company and its stability.
Types of Permanent Accounts
There are three broad categories of permanent accounts: assets, liabilities, and equity. Both have their special ways of indicating the financial position of the company.
Asset Accounts
The things a company possesses that have economic value are called assets. They are, in turn, divided into the following:
- Current Assets
- Non-Current (Fixed) Assets
- Intangible Assets
Liability Accounts
Liabilities refer to the amount owed by a company to other people. These include:
- Current Liabilities
- Long-Term Liabilities
Equity Accounts
Equity denotes ownership stake in the Business, and it is composed of:
- Common Stock
- Retained Earnings
- Additional Paid-in Capital
Temporary vs. Permanent Accounts: What’s the Difference?
To have an idea of what is not a temporary account, we need to appreciate the difference between the two categories.
| Feature | Permanent Accounts | Temporary Accounts |
| Balance Treatment | Carries Forward | Reset to zero after each period |
| Financial Statement | Balance Sheet | Income Statement |
| Closure Process | Not closed | Closed at the end of the period |
| Examples | Assets, Liabilities, Equity | Revenues, Expenses, Dividends |
Why It’s Important to Know the Difference
Knowing what accounts are permanent provides complete and honest-to-goodness money reporting. It is business-like:
- Consistency of the same year-over-year financial reporting must be easily obtainable, either by reference to where they filed the financials previously or through the EDGAR database.
- Guard against instances of wrong accounting and tax filing practices.
- That is, long-term decisions that affect a company are made based on credible data points.
Real-Life Examples of Permanent Accounts
In an attempt to have a better grasp of such accounts in practice, the following cases can be mentioned:
- Retail Business: the cash Register System(asset), Rent Payable( liability), and others, Retained Earnings(equity).
- Manufacturing Firm: Equipment used in production (asset), long-term loan (liability), capital of the owner (equity).
- Technology Company: The deferred tax liabilities (current liability), common stock (common stock equity), Technology Company Patents (current non-current intangible asset).
Best Practices for Managing Permanent Accounts
The maintenance of the permanent accounts that are up to date and correct is vital to the financial integrity. Some of the best practices are as follows:
- Regular Reconciliation: Ensure that there are checks on the balances in the account to correspond with those of the bank and the vendors.
- Reliable Software: Dependable software can take the form of using reliable accounting systems to automate tracking and minimize errors.
- Comprehensive Record-Keeping: A Record of all purchases, liabilities, and changes of equity should be kept using proper invoices and statements.
- Compliance with Standards: Abide by the truthfulness and disclosure set out in the GAAP or the IFRS accounting standards.
Conclusion
Temporary accounts are not permanent accounts (i.e., permanent accounts) but those that are not. They are not closed, and they are used to maintain balances forward between accounting periods. They are essential in offering a long-term perspective of the financial position of a company. Learning this difference can make businesses practice healthy financial behavior, abide by the law, and make business strategic decisions based on facts.
