Permanent accounts are ledger accounts that are not closed at the end of an accounting cycle rather their balance is carried forward to next period. All asset accounts, liability accounts and equity accounts other than dividends paid account are permanent accounts.
Permanent accounts are exact opposite of temporary accounts which are closed at a period end and they have zero balance carried forward to next period. Income accounts, expense accounts and dividends paid account are temporary accounts.
Shereen Cola is a company that manufactures beverages in Pakistan. According to its unadjusted trial balance as at 31 December 2012, total assets are 1 billion PKR, its liabilities are 600 million PKR, its common stock is 150 million PKR and its retained earnings are 250 million PKR. The company's revenue for the financial year 2012 is 800 million PKR and its expenses are 600 million PKR. It paid dividends of 100 million PKR.
At the closing stage of the accounting cycle, the balances in revenue accounts are credited to income and expense summary account, the balances in expense accounts are debited to income and summary account. The net balance in the income and summary account and the balance in dividends paid account are carried to retained earnings account. This results in zero balance in all revenue accounts, all expense accounts, the income and expense summary account and the dividends paid account. These accounts are temporary accounts while all other accounts (all assets, all liabilities, common stock and retained earnings accounts) are permanent accounts.
Written by Obaidullah Jan, ACA, CFA