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Which of the Statements Below Describe(s) A Temporary Account? (Check All That Apply.)
In accounting, temporary accounts are used to record transactions and events during a specific accounting period. These accounts are also known as nominal accounts and are closed at the end of the period to transfer their balances to permanent accounts. Temporary accounts are crucial for accurately measuring the financial performance of a company over a specific period. Let’s explore the statements that describe temporary accounts:
1. Temporary accounts are used to track revenues and expenses.
One of the primary purposes of temporary accounts is to record revenues and expenses incurred during a specific accounting period. Revenues represent the income generated by a company, while expenses represent the costs incurred to generate that revenue. By tracking these transactions in temporary accounts, a company can determine its net income or net loss for the period.
2. Temporary accounts include revenue accounts.
Revenue accounts such as Sales Revenue, Service Revenue, or Interest Income are temporary accounts. These accounts track the income earned by a company from its primary business operations. At the end of the accounting period, the revenue accounts’ balances are closed and transferred to the income summary account.
3. Temporary accounts include expense accounts.
Expense accounts such as Rent Expense, Salaries Expense, or Advertising Expense are also temporary accounts. These accounts track the costs incurred by a company to operate its business. Similar to revenue accounts, the balances of expense accounts are closed and transferred to the income summary account at the end of the accounting period.
4. Temporary accounts include dividend or withdrawal accounts.
Dividend or withdrawal accounts are temporary accounts that track the distributions of profits to owners or shareholders. These accounts represent the company’s payments to its owners and are closed at the end of the period. The balance of the dividend or withdrawal account is transferred to the retained earnings account.
FAQs about Temporary Accounts:
Q: Why are temporary accounts closed at the end of the accounting period?
A: Temporary accounts are closed to measure the financial performance of a company accurately. By closing these accounts, the revenues, expenses, and dividend or withdrawal accounts’ balances are transferred to the appropriate permanent accounts, such as retained earnings. This process ensures that the company’s financial statements reflect only the transactions of the current period.
Q: What happens to the balances of temporary accounts after they are closed?
A: After the temporary accounts are closed, their balances are transferred to the income summary account. The income summary account is an intermediate account used to calculate the net income or net loss for the period. The balance of the income summary account is then transferred to the retained earnings account, increasing or decreasing the company’s equity.
Q: Can temporary accounts have a balance at the beginning of an accounting period?
A: Temporary accounts are zeroed out at the beginning of each accounting period. The balances from the previous period are closed by transferring them to the appropriate permanent accounts. This ensures that the temporary accounts only reflect the transactions and events of the current period.
In conclusion, temporary accounts play a crucial role in accurately measuring a company’s financial performance over a specific accounting period. These accounts track revenues, expenses, and dividend or withdrawal transactions, which are closed at the end of the period. By understanding and effectively using temporary accounts, businesses can analyze their financial results and make informed decisions for future success.
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