Permanent Accounts and Temporary Accounts

Accounts can be divided into Permanent accounts, those that carry forward from one year to the next and Temporary accounts, those that we close out at the end of each year. Once you can classify your accounts to their element it is very easy to know which are the temporary accounts.

Assets = Liabilities + Owners Equity. Assets and Liabilities are all permanent accounts, as is the Owners' Equity capital account (there can be multiple capital accounts depending on ownership structure). The rest of the accounts (Capital Introduced, Drawings, Revenue and Expenses) are temporary accounts. At the end of each year we empty these temporary accounts into the Owners' Equity capital accounts by a process known as closing.

In Summary

A=L+OE(capital closing balance)

Owners Equity Capital Account Closing Balance = OE(OB)+CI-D+R-E. These are the temporary accounts.

At the end of each year we close (i.e. empty out) all of the temporary accounts in the Owner's Equity Capital account.