Introduction to Permanent and Temporary Accounts

Introduction to Permanent and Temporary Accounts

Anybody with the most basic knowledge in accounting knows that there are several forms of accounts in which each of them possesses a particular aim. The best accounting firms in Johor Bahru, as well as the accounting firms all over the world, can recognise all the various categories of accounts. There are a lot of ways we can use to classify them. One prevalent method of categorising them is by dividing them into permanent and temporary accounts.

Temporary Accounts

Temporary accounts possess a restricted lifespan, normally one year. As soon as they have completed their function, the accountants would move their balances to the corresponding permanent accounts and close them forever. So, in temporary accounts, accountants would not carry their balances over from an accounting period to the following. The objective of temporary accounts is to illustrate the expenditures, profits, as well as the withdrawals that impact the equity of the owner in that particular accounting period.

Three types of account are categorised as temporary accounts, which are the expense accounts, revenue accounts and withdrawal accounts.

  1. Expense accounts: These accounts monitor the reduction in the owner’s equity as a result of the spending associated with daily functions.
  2. Revenue accounts: These accounts monitor the boost in the owner’s equity as a result of the sales of the services and goods.
  3. Withdrawal accounts:  Some people would call it as the owner’s drawing accounts. These accounts monitor the sum of money the owner has taken out from the business for private use.

An instance of a temporary account is as follows:

Mary owns a stationery shop. When a fiscal year ends, she has gained an income of RM80,000 from her sales, spent RM20,000 on everyday functions, and took out RM15,000 for her private use (Also see Money Management Tips for Startups).

When a new fiscal year starts, Mary has to set the balances of her expense accounts, revenue accounts as well as withdrawal accounts to zero. It is because of the balances of the year before are not related to your new expense accounts, revenue accounts and withdrawal accounts.

Permanent Accounts

Some people would call permanent accounts as real accounts. They exist forever, and you have to carry their balances over from one accounting period to the following. You will list these accounts on the balance sheet of your company. They display the exact value of the company when you generate the balance sheet. You will never close or transfer the balances of these accounts to the capital account of the firm. It is not a must for a permanent account to keep a balance. If you did not make any transaction, it might possess a zero balance.

Three types of account are categorised as permanent accounts, which are the liability accounts, owner’s equity accounts and asset accounts.

  1. Liability accounts: These accounts present debts the firm owes to its creditors. Liabilities consist of income tax, salaries, loans payable, accounts payable, bonds payable, as well as interests payable.
  2. Owner’s equity accounts: These accounts present the financial investment the owners of the firm have made in the business.
  3. Asset accounts: These accounts present the tangible as well as intangible assets which a firm possesses. Assets consist of buildings, lands, furnishings (Also see FRS 16: Property, Plant and Equipment), cash, inventory, goodwill as well as various other objects.

To select the best form of account for your firm, it is of utmost importance to have a deep understanding of the various kinds of accounts, how to classify them, as well as what they imply to your firm. Do not hesitate to engage an accounting firm in Johor Bahru if you require any assistance (Also see Ways To Select The Best Accounting Firm). They will aid you in creating the correct form of account based on the needs of your firm.