Temporary Accounts

Definition

Temporary accounts are accounts that are used to record transactions for a single accounting period. They are also known as nominal accounts or temporary ledger accounts. These accounts are closed at the end of the accounting period and the balances are transferred to permanent accounts. Temporary accounts are used to record revenues, expenses, gains, and losses.

Example

For example, a revenue account records all of the income earned by the business for the reporting period. If a temporary revenue account records revenues earned of $10,000 for the period, a debit entry will be made for the same amount at the end of the reporting period to bring the total balance to zero.

Why it Matters

Temporary accounts are important for businesses because they provide a way to track and record transactions for a single accounting period. This helps businesses to accurately report their financial performance and to make informed decisions. Additionally, temporary accounts help businesses to identify areas where they can improve their operations and to identify potential risks. Finally, temporary accounts help businesses to comply with accounting standards and regulations.