temporary accounts

Imagine keeping a running tally on a whiteboard of everything you earned and spent this year — then wiping the board clean on New Year's Day so next year starts fresh at zero. That wipe is exactly what accounting does with temporary accounts. They measure activity for a single period only, and at period end their balances are cleared out so the new period begins empty, ready to count its own results from scratch.

Temporary accounts are the revenue, expense, and (in a proprietorship or partnership) owner-withdrawals accounts — sometimes plus a holding account called Income Summary. They are 'temporary' because their job is to accumulate one period's income and outflows; the net result, the profit or loss, is then transferred into a permanent equity account (Retained Earnings for a corporation, or the owner's capital account). After this closing process, every temporary account holds a zero balance. If Service Revenue ended the year at 90,000 and total expenses at 70,000, both are zeroed and the 20,000 net income flows into equity.

The distinction between temporary and permanent accounts is the backbone of the closing process and of the whole accounting period assumption — the idea that an ongoing business can be sliced into discrete reporting periods. A common confusion is thinking the year's revenue figure carries forward; it does not. Only the bottom line lands in equity, and the revenue and expense accounts restart at zero so that next year's income statement reports next year's activity alone.