Accounting uses multiple financial accounts to organize and retain financial information relating to business transactions. The accounts are either permanent or temporary.
Accounting uses multiple financial accounts to organize and retain financial information relating to business transactions. The accounts are either permanent or temporary. The type of account is very important because certain activities during the accounting cycle affect temporary accounts more than permanent ones. For example, the month-end close process focuses on temporary accounts rather than permanent ones.
A permanent account holds financial information for multiple accounting periods. The information stays in the account until moved by an accountant to another account. Examples include asset, liabilities and equity accounts. The information in these accounts includes items owned by the business, claims against assets and retained earnings or common stock issued by the company, respectively.
The balance sheet reports all information from a company’s permanent accounts. The statement “information as of” signifies financial data relates to a specific time period, such as month or year. Essentially, the balance sheet reports financial information as a snapshot in time. The value of most permanent accounts will typically change after this date. The statement informs shareholders about the date of information, which provides insight into a company’s value at a given time.
Permanent accounts do not close at the end of each month. In reality, permanent accounts receive information from temporary accounts during the close process. For example, all revenue, cost of goods sold and expense accounts close to retained earnings, a permanent account. This allows a company to report how much retained earnings increased through the profits earned by the business.
Permanent accounts do not typically carry this label in the general ledger. Accountants simply know and define the accounts by the information they retain. In some businesses, accountants may group accounts by their type in the general ledger. For example, all asset accounts are one group and liability accounts another. This makes it easier to prepare financial statements at month end using a trial balance report.
- "Fundamental Financial Accounting Concepts"; Thomas P. Edmonds, et al.; 2011