Permanent Accounts

Permanent accounts, also called real accounts, are the accounts whose balances continue from one accounting period to the next. They are the asset, liability and equity accounts that make up the balance sheet, such as cash, accounts receivable, inventory, equipment, accumulated depreciation, accounts payable, loans, common stock and retained earnings. The closing balance of a permanent account at the end of one year becomes its opening balance for the next.

Permanent accounts are contrasted with temporary, or nominal, accounts: revenues, expenses, gains, losses and dividends or owner's drawings. Temporary accounts measure activity for a single period and are reset to zero at the end of each year through closing entries, with their net effect transferred into a permanent equity account. The distinction is a core part of the accounting cycle.

• Assets: cash, investments, receivables, inventory, prepaid expenses, land, buildings, equipment and intangible assets.
• Contra assets: accumulated depreciation and the allowance for doubtful accounts, which also carry forward.
• Liabilities: accounts payable, accrued liabilities, unearned revenue, notes payable, bonds and lease liabilities.
• Equity: common and preferred stock, additional paid-in capital, retained earnings, treasury stock and accumulated other comprehensive income; in a sole proprietorship or partnership, the owners' capital accounts.

A landscaping business ends its first year with these balances: cash $16,000, equipment $60,000, accumulated depreciation $12,000, a bank loan of $30,000, owner's capital of $25,000 at the start, service revenue of $95,000, expenses of $72,000 and owner's drawings of $14,000.

The permanent accounts carry their balances into year two unchanged: cash $16,000, equipment $60,000, accumulated depreciation $12,000 and the loan $30,000. The temporary accounts are closed. Revenue of $95,000 and expenses of $72,000 are closed through the income summary account, giving net income of $23,000, which is transferred to the owner's capital account. Drawings of $14,000 are then closed to capital. The capital account, a permanent account, ends the year at:

Here $\text{Opening capital}$ is the owner's equity at the start of the year, $\text{Net income}$ is the profit closed from the temporary accounts, and $\text{Drawings}$ are amounts the owner withdrew. Ending capital is $25,000 plus $23,000 minus $14,000, or $34,000. In line with the accounting equation, the balance sheet then balances: assets of $16,000 plus $60,000 minus $12,000, or $64,000, equal the $30,000 loan plus $34,000 of capital. If the two sides did not agree, the accountant would look for errors such as unrecorded revenue, an expense posted twice or a closing entry made to the wrong account. Testing that the permanent accounts balance in this way is a routine step before the new year begins.

Separating permanent and temporary accounts ensures that each period's income statement shows only that period's results, while the balance sheet reflects the cumulative position. After closing, a post-closing trial balance lists only permanent accounts, which confirms that every temporary account has been reset. Mistakes, such as closing a liability account or failing to close a dividends account, distort both statements. Accounting software handles the closing process automatically, but accountants still review the post-closing balances, reconcile key permanent accounts such as cash and receivables, and confirm that the opening balances of the new year match the audited closing balances of the old one, which is also why corrections to permanent accounts from prior years are made through retained earnings rather than current income.