Temporary (nominal) accounts

Definition

Temporary (nominal) accounts are financial accounts that track revenues, expenses, and dividends over a single accounting period. These accounts are closed at the end of each period to prepare for the next.

5 Must Know Facts For Your Next Test

1. Temporary accounts include revenue, expense, and dividend accounts.
2. These accounts are closed to the Retained Earnings account during the closing process.
3. The purpose of closing temporary accounts is to reset their balances to zero for the new accounting period.
4. Closing entries transfer net income or loss and dividends to retained earnings.
5. Temporary accounts are different from permanent (real) accounts, which carry forward their balances into future periods.

Review Questions

Related terms

Permanent (real) Accounts: These are balance sheet accounts whose balances are carried forward into future accounting periods.

Closing Entries:

Journal entries made at the end of an accounting period to transfer balances from temporary accounts to permanent ones.

Retained Earnings:

The cumulative amount of net income retained in a company after dividends have been paid out.