A temporary account is an account in which transactions are accumulated for one accounting year, after which the account is zeroed out and used again in the next accounting year to accumulate a new set of transactions.
Temporary accounts are used to compile transactions that impact the profit or loss of a business during a year. Examples of temporary accounts are:
- Revenue accounts
- Expense accounts (such as the cost of goods sold, compensation expense, and supplies expense accounts)
- Gain and loss accounts (such as the loss on assets sold account)
- Income summary account
The balances in these accounts should increase over the course of an accounting year; they rarely decrease. The balances in temporary accounts are used to create the income statement.
At the end of an accounting year, the balances in temporary accounts are shifted to the retained earnings account, sometimes by way of the income summary account. The process of shifting balances out of a temporary account is called closing an account. This shifting to the retained earnings account is conducted automatically if an accounting software package is being used to record accounting transactions.
The other main type of account is the permanent account, in which balances are retained on an ongoing basis. These accounts are aggregated into the balance sheet, and include transactions related to assets, liabilities, and equity.
A temporary account is also known as a nominal account.