A temporary account is a general ledger account that begins each accounting year with a zero balance. At the end of the accounting year any balance in the account will be transferred to another account. This is referred to as closing the account. An example of a temporary account is the Sales account. The Sales account is used to keep a log of the sales occurring only in the current accounting year. After the sales for the year have been reported, the balance in the Sales account will be transferred or closed to another account thereby returning the account balance to zero.
Temporary accounts include all of the income statement accounts: revenues, expenses, gains, losses. After the amounts for the year have been reported on the income statement, the balances in the temporary accounts will end up in a permanent account such as a corporation's retained earnings account or in a sole proprietor's capital account. (In manual systems, the balances in the temporary accounts will be transferred to an income summary account. Next the income summary account will be transferred to retained earnings or to the owner's capital account. Hence, the income summary account is also a temporary account.)
A temporary account that is not an income statement account is the proprietor's drawing account. The balance in the drawing account is transferred directly to the owner's capital account and will not be reported on the income statement or in an income summary account.
After working as an accountant, consultant, and university accounting instructor for more
than 25 years, Harold Averkamp formed AccountingCoach in 2003. His goal was to
share his knowledge and passion for teaching accounting with people throughout the
world at a very low cost. Read More...