Permanent accounts are also called real accounts. These accounts represent the ongoing, long-term activity of a company. The balances in these accounts are not closed out at the end of each accounting period like the balances in temporary accounts. Instead, the balances in permanent accounts are carried over from one period to the next.
The most common permanent accounts are asset, liability, and equity accounts. Permanent accounts could include a savings account, which represents money that will be carried over from one period to the next. For example in the manufacturing industry, permanent accounts could include the value of the machinery and equipment. This value is not closed out at the end of each accounting period. Instead, it is carried over from one period to the next.
Temporary accounts are also called nominal accounts. These accounts represent the activity of a company for a single accounting period. The balances in these accounts are closed out at the end of each accounting period. This means that the balances in temporary accounts start at zero at the beginning of each accounting period.
The most common temporary accounts are revenue, expense, and withdrawal accounts. A temporary account could include a checking account, which represents money that will be spent in the current period. For example in the manufacturing industry, a temporary account could include the cost of raw materials. This cost is closed out at the end of each accounting period.