Permanent accounts are accounts that are not closed at the end of the accounting period, hence are measured cumulatively. Permanent accounts refer to asset, liability, and capital accounts -- those that are reported in the balance sheet.
Also known as: Real accounts, Balance sheet accounts
Permanent accounts are the accounts that are reported in the balance sheet. They include asset accounts, liability accounts, and capital accounts.
Asset accounts - asset accounts such as Cash, Accounts Receivable, Inventories, Prepaid Expenses, Furniture and Fixtures, etc. are all permanent accounts. Contra-asset accounts such as Allowance for Bad Debts and Accumulated Depreciation are also permanent accounts.
Liability accounts - liability accounts such as Accounts Payable, Notes Payable, Loans Payable, Interest Payable, Rent Payable, Utilities Payable and other types of payables are permanent accounts.
Capital accounts - capital accounts of all type of businesses are permanent accounts. This includes owner's capital account in sole proprietorship, partners' capital accounts in partnerships; and capital stock, reserve accounts, and retained earnings in corporations.
Unlike temporary accounts, permanent accounts are not closed at the end of the accounting period. Hence, they are measure cumulatively. For example, the balance of Cash in the previous year is carried onto the next year. If at the end of 2020 the company had Cash amounting to $100,000, that amount will be carried as the beginning balance of cash in 2021. If cash increased by $50,000 during 2021, then the ending balance would be $150,000. This amount will again be carried onto 2022. And the cycle goes on.
Temporary accounts are not carried onto the next accounting period. They are measured from period to period only. Temporary accounts include revenues, expenses, and withdrawals. They are closed at the end of every year so as not to be mixed with the income and expenses of the next periods. This way, users would be able know how much income was generated in 2019, 2020, 2021, and so on. Temporary accounts are closed into capital at the end of the accounting period.
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