Permanent account definition
/What is a Permanent Account?
Permanent accounts are those accounts that continue to maintain ongoing balances over time. All accounts that are aggregated into the balance sheet are considered permanent accounts; these are the asset accounts, liability accounts, and equity accounts. In a nonprofit entity, the permanent accounts are the asset, liability, and net asset accounts. Permanent accounts are the subject of considerable scrutiny by auditors, since transactions stored in these accounts possibly should be charged to revenue or expense and are thereby flushed out of the balance sheet.
A permanent account does not necessarily have to contain a balance. If no transactions are ever recorded that involve such an account, or if the balance has been zeroed out, a permanent account may contain a zero balance.
It is reasonable to periodically review the need for permanent accounts and see if any should be combined, in order to reduce the number of accounts for which the accounting staff must monitor the contents.
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Examples of Permanent Accounts
Several examples of commonly-used permanent accounts are noted below:
Cash. Cash represents the funds a company has on hand or in bank accounts at any given time. It is a permanent asset account that carries its balance forward into each new accounting period.
Accounts receivable. Accounts receivable reflects amounts owed to the business by customers for goods or services sold on credit. As an asset account, its balance remains until payment is received or written off.
Inventory. Inventory tracks the value of goods held for sale or production. It is a continuing asset account that is adjusted as inventory is purchased, sold, or written down.
Accounts payable. Accounts payable shows the company’s outstanding obligations to suppliers or vendors for purchases made on credit. It is a liability account that carries forward until the debts are settled.
Retained earnings. Retained earnings record the cumulative net income of a business that has not been distributed as dividends. It is a component of equity and is adjusted annually but never reset to zero.
Common stock. Common stock represents the equity capital raised from shareholders in exchange for ownership in the company. This account remains unchanged unless the company issues or repurchases shares.
What is a Temporary Account?
The other type of account is the temporary account, which only accumulates information for one fiscal year, at the end of which the information is shifted into the retained earnings account (which is presented in the equity section of the balance sheet). All accounts that are aggregated into the income statement are considered temporary accounts; these are the revenue, expense, gain, and loss accounts.
Comparing Permanent Accounts and Temporary Accounts
There are several key differences between permanent accounts and temporary accounts, which are as follows:
Balance duration. The balance in a permanent account may potentially last forever, while the balance in a temporary account will be flushed out at the end of the fiscal year.
Types of information stored. A permanent account may contain information about asset, liability, and equity balances, while a temporary account may contain information about revenues, expenses, gains, and losses.
Terms Similar to Permanent Account
Permanent accounts are also known as real accounts.