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the end of the year its account balance is removed by transferring the amount to another account. This is done through closing entries. Temporary accounts are also referred to as nominal accounts.
All of the income statement accounts are classified as temporary accounts. A few other accounts such as the owner's drawing account and the income summary account are also temporary accounts.
Examples of Temporary Accounts
Temporary accounts include all of the various groups of income statement accounts:
- Revenues
- Expenses
- Gains
- Losses
Having temporary income statement accounts makes for easy reporting of each year's details. After the amounts for the year have been reported on the income statement, the balances in the temporary accounts will end up in a permanent account such as a corporation's retained earnings account or in a sole proprietor's capital account. (In a manual system, the balances in the income statement accounts will first be closed to an income summary account. Next, the income summary balance will be transferred to the corporation's retained earnings or to the sole proprietor's capital account.)
A temporary account that is not an income statement account is the proprietor's drawing account. The balance in the drawing account is transferred directly to the owner's capital account and will not be reported on the income statement or in an income summary account.