A temporary account measures activity for one reporting period. Revenue, expense, gain, loss, and dividend accounts normally close at period-end so the next period starts without the prior period's activity in those balances.
Decide from the account's purpose
Service Revenue measures revenue for the period. Cash records an asset still held at the reporting date. Service Revenue closes; Cash carries forward. The same distinction separates Depreciation Expense from Accumulated Depreciation.
Dividends are temporary but are not expenses. They reduce retained earnings separately from net income. Classifying every temporary account as an expense would confuse owner distributions with the costs of earning revenue.
Use the actual balance
Close a credit balance with an equal debit and a debit balance with an equal credit. The other side transfers the effect into the appropriate equity or intermediate closing account. Inspect the actual balance, including any unusual balance, rather than relying only on its normal side.
The closing-entry reference explains direct closing and the Income Summary alternative. Both methods reset temporary balances and leave the same ending equity.
Keep the prior period's records
Closing adds entries. It does not erase invoices, original journal entries, ledger postings, or issued statements. A zero post-closing revenue balance therefore does not mean the company had no revenue.
If you sum transactions across periods, retain their period labels and separate closing transfers from customer activity. Otherwise, a correct zero account balance can be mistaken for a measure of the year's sales.
Put the concept to work
Understand this concept
- Explain why temporary accounts accumulate one period's activity and reset without erasing the underlying journal and ledger history.
Apply this concept
- Classify basic revenue, expense, and owner-distribution balances as temporary and determine the opposite-side entries needed to bring them to zero.
Learning resources
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Build on these ideas
- Account — Understand
To understand this concept: Required. A temporary account is an accumulation record whose period scope must be distinguished from the underlying economic events.
- Distribution to owner — Understand
To apply this concept: Helpful. Owner distributions close through equity but are not expenses or part of net income.
- Expense — Understand
To understand this concept: Required. Expense is a primary temporary account family whose period activity affects equity through performance.
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- Normal balance — Apply
To apply this concept: Required. Bringing an account to zero requires an entry on the side opposite its actual ending balance.
- Revenue — Understand
To understand this concept: Required. Revenue is a primary temporary account family whose period activity affects equity through performance.
- Temporary account — Understand
To apply this concept: Required. Closing direction follows from the account's current balance and its period-only purpose.
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Related concepts
Show 3 more related concepts
Use this idea next
- Closing entry — Understand
Required level here: understand. Required. The accounts being zeroed must be distinguished from continuing balance-sheet and equity accounts.
- Income summary — Understand
Required level here: understand. Required. It is itself a temporary account and is empty at every reporting date.
- Temporary account — Apply
Required level here: understand. Required. Closing direction follows from the account's current balance and its period-only purpose.
Used in these readings
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