Permanent AccountsDefinition, Types, and Examples
What is a Permanent Account?
Permanent Accounts are accounts with balances that carry over to the next business period.
Over time, their balances increase, decrease or are brought to a zero balance, but the account is never closed in the books.
Permanent accounts are also called real accounts and they make up the Assets, Liabilities and Owner’s Equity accounts of the Balance Sheet with the exception of a Drawing Account (closed against capital at year end).
Because these accounts are not closed at financial year end, auditors take the time to scrutinize the transactions within the period to make sure that income statement items such as revenues and expenses are not recorded under permanent accounts.
Unlike nominal accounts that start at zero in the next accounting period, the beginning balance of permanent accounts is the ending balance of the last accounting period.
Because permanent accounts are balance sheet accounts, they represent the actual worth of the company at a specific point in time.
It is for this reason that accountants also review the need of new permanent accounts or whether or not some permanent accounts need to be combined.
Having too many will pose more work for accountants to monitor over time.
Permanent Accounts are also called Real Accounts and they are accounts that are found in the Balance Sheet except for a drawing account.
Examples of Permanent Accounts
Permanent accounts are essentially Balance Sheet accounts – except for the drawings account.
Examples of permanent accounts classified under Assets, Liabilities and Capital are the following:
Under Assets, permanent accounts include Cash, Accounts Receivables, Inventories, Fixed Assets such as Land, Building, Leasehold Improvements, Machineries, Furniture and Fixtures, Vehicles, etc. Contra Accounts such as Allowance for Bad Debts and Accumulated Depreciation are also considered as permanent accounts.
Short-term and Long-term liabilities that include Accounts Payable, Notes Payable, Mortgage Payable, Salaries and Wages Payable, Income Tax Payable, Interest Payable, Rent Payable and other types of payables are also classified as a permanent account.
In Sole Proprietorship, the capital account is called owner’s capital.
In partnerships, it is called partners’ capital account and in Corporations, it is called Retained Earnings, Capital Stock and Reserve Account.
Accounting for Permanent Accounts
Unlike nominal accounts that are closed at the end of each accounting period, permanent accounts have cumulative balances.
It means that the total of each account increases or decreases over a period of time.
For example, Fixed Assets have a balance of $600,000 at the end of 2019.
During the year 2020, the company purchased additional fixed assets in the amount of $120,000.
By the end of 2020, the balance sheet will show a total Fixed Assets in the amount of $720,000 and it shall be carried forward in the year 2021.
If the opening balance of Fixed Assets in 2020 is $600,000, the opening balance for the year 2021 is $720,000.
This is in contrast to nominal accounts.
If the company reports a total revenue of $250,000 and total expenses of $100,000, these amounts are closed to a permanent account so that in the next accounting period, their balances are back to zero.
This is because nominal accounts are only measured for the accounting period that it covers.
What is a Temporary Account?
Temporary accounts or nominal accounts only record transactions that happened during a certain period and at the end of which, they are closed to permanent accounts.
Examples of temporary accounts are revenues, expenses, gains and losses.
When an accounting period begins for the next year, the temporary accounts open with a zero balance.
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