What are temporary accounts?

Definition and Example of Temporary Accounts

How Temporary Accounts Work

Types of Temporary Accounts

Definition and Example of Temporary Accounts

Temporary accounts are accounts that track a company’s financial activity over a specific period. These accounts are short-term and are typically closed at the end of each accounting period. Whether you are a small business owner or a senior accountant at a large firm, temporary accounts can help you track your economic activity, manage your company’s funds, and maintain a clear record of the profits and losses generated by the business.

How Temporary Accounts Work

Using temporary accounts can help maintain accurate records of economic activity during each accounting period. Temporary accounts serve as temporary records to ensure that transactions conducted in one period do not get mixed up with data from the following year. For example, if company XYZ generates $40,000 in revenue during one accounting period, the amount can be recorded for that period in a temporary account. The temporary account will then start the next accounting period without any revenue.

Avoiding the mixing of this data and obtaining an accurate picture of the transactions taking place over a specified timeframe, temporary accounts can be extremely useful. They can create clear boundaries to separate economic activity for better tracking and more efficient financial management.

Entries in temporary accounts can be made either manually or through automated programs. For example, an accountant can enter data in a printed spreadsheet (manual entry) or use online tools like Google Sheets, Microsoft Excel, or other free and paid accounting software.

Temporary accounts can be maintained year after year, quarterly, or monthly, depending on your accounting period. Since temporary accounts are short-term accounts, their data entries are transferred to the related permanent accounts for closure and long-term financial record-keeping. These permanent accounts maintain a cumulative balance and provide a broader view of the ongoing transactions of the company.

Types of Temporary Accounts

Types of temporary accounts include revenue accounts, expense accounts, and income summary accounts. Let’s explore each of these examples in detail.

Revenue Accounts

Revenue accounts are used to track the amount of money earned during a specific period. Money received from the sale of goods and services during the accounting period is recorded in these accounts. Types of income-related accounts for revenue include sales accounts, profit statements, and interest income accounts, among others.

Expense Accounts

Expense accounts are used to track the amount of money spent to keep the business running. This can include costs such as rent, utilities, employee salaries, and other operational expenses. Types of expense accounts include cost of goods sold, salary expense accounts, purchase accounts, and more.

Income Summary Accounts

At the end of the accounting period, entries from all revenue and expense accounts are transferred to the income summary account. This data reflects the net profit or loss incurred by the company during a specific accounting period or other specified timeframe.

Summary of Key Points:

• During the accounting period, temporary accounts are opened with a zero balance and are eventually closed to maintain a record of accounting activity.
• Entries can be made in temporary accounts either manually or through automated programs.
• The three types of temporary accounts include revenue accounts, expense accounts, and income summary accounts.
• Entries from temporary accounts are transferred to permanent accounts to close the temporary accounts.

Source: https://www.thebalancemoney.com/what-are-temporary-accounts-5221595

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