Permanent accounts are accounts whose balances carry over from one accounting period to another.
Permanent accounts are shown on the balance sheet. In other words, permanent accounts are asset, liability, and equity accounts. Permanent accounts convey information about a company’s financial position.
Temporary accounts are accounts whose balances begin an accounting period at zero.
Temporary accounts are shown on the income statement. In other words, temporary accounts are revenue, expense, gain, and loss accounts. Temporary accounts convey information about a company’s operations in a given accounting period.
For example, suppose a company’s income statement for the month of January shows the following: $1 million in revenue, $600,000 in cost of goods sold, $200,000 in selling, general, and administrative (SG&A) expense, $15,000 in interest expense, and $50,000 in tax expense. The balance sheet as of the end of January shows $2 million in assets, $1.2 million in liabilities, and $800,000 in equity. What are the balances for these accounts at the beginning of February?
In the above example, revenue, cost of goods sold, SG&A, interest expense, and tax expense are temporary accounts, so these accounts start at zero. In other words, the entire income statement begins the period at zero, since the income statement is comprised of temporary accounts. The asset, liability, and equity accounts are permanent accounts. So, the beginning balance sheet in February is the same as the ending balance sheet in January, since these account balances carry over from the previous month.
