Temporary accounts are income statement accounts generated to interpret the accounting activity during an accounting period. For example, the revenues account records the number of revenues earned during an accounting period – not during the term of the company. Besides revenues, expenses, gains, and losses are some of the temporary accounts – essentially any account that the income statement accommodates. Additionally, the income summary account, which is an account used to summarize temporary account balances before shifting the net balance elsewhere, is also a temporary account.
Unlike permanent accounts, temporary accounts accumulate balances for a single financial year and are then closed or reset as the fiscal year ends so the beginning of the subsequent year will have no carried forward balance, to begin with. Closing of temporary accounts is necessary to prevent their existing balances from being mixed with the balances of the next accounting period. Therefore, revenue, expense, and withdrawal account always start with zero balance at the start of the new financial year because they are always closed at the end of the previous year. The purpose of doing so is to show the profits that were produced and the accounting activity of individual periods. This concept is in line with the matching principle that requires a company to match expenses with related revenues in order to report a company’s profitability during a specified time interval.