Discuss the differences between temporary and permanent accounts. What will happen if the temporary accounts like revenue, expense and dividend accounts are not closed in the ledger? Should the permanent accounts like all asset, Stockholders' equity and liability accounts be closed as well?
If the temporary accounts are not closed at the end of the accounting period (the end of the year), the balances will be brought forward for the revenue, expenses, and dividends. For example, let's say in year 1 we have $100,000 in total revenue. Revenue is a temporary account. If we do not close the revenue account, the total amount of revenue of $100,000 will remain at that amount, on January 1st. If we have a total ...
This solution discusses the main differences between temporary and permanent accounts, and the effects to revenue, expense, and dividend accounts if they are not closed at the appropriate intervals. This solution also thoroughly explains if the permanent accounts (balance sheet accounts) should also be closed.