Permanent Accounts

Permanent accounts (also called real accounts) are those ledger accounts whose closing balance in one period becomes their opening balance in the next period. All balance sheet accounts are permanent accounts.

During the closing stage of the accounting cycle, balances in the permanent accounts are not transferred to any summary account but are retained so that may be carried forward.

Permanent accounts vs temporary accounts

Permanent accounts are the exact opposite of temporary accounts which are closed at a period-end. All income statement accounts are primarily temporary accounts. During the closing stage, all income and expense balances are transferred to the income and expense summary account and eventually to the retained earnings.

A post-closing trial balance contains only permanent account balances.

Example

Shereen Cola is a company that manufactures beverages. According to its unadjusted trial balance as at 31 December 20X2, its total assets are $1 billion, its liabilities are $600 million, its common stock is $150 million, and its retained earnings are $250 million. The company's revenue for the financial year 20X2 is $800 million and its expenses are $600 million. During the year, the company paid dividends of $100 million.

At the closing stage of the accounting cycle, the balances in revenue accounts are credited and the balances in expense accounts are debited to the income and summary account. The net balance in the income and summary account and the balance in dividends paid account are carried to the retained earnings account. This results in zero balances 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) are permanent accounts.

by Obaidullah Jan, ACA, CFA and last modified on

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