Definition: A permanent account, also called a real account, is a balance sheet account that is used to record activities that relate to future periods. The reason they are called permanent accounts is because they are never closed at the end of an accounting period. In a sense, they are permanent fixtures on the financial statements.
What Does Permanent Account Mean?
Permanent accounts carry the ending balances of the balance sheet to the beginning of the next year. For instance, the ending inventory balance for year one is the beginning inventory balance for year two. These accounts are not zeroed out with closing entries at the end of the year like temporary accounts on the income statement.
Instead, the permanent asset, liability, and equity accounts maintain balances year over year to trace the financial history of the company.
Take the retained earnings account for example. Retained earnings represents the cumulative income or loss kept by the company and owned by the shareholders. Every year the income and expense accounts are reported on the income statement and then closed out to the income summary account.
At the end of the accounting cycle, the income summary account is closed to the retained earning account. Retained earnings, however, isn’t closed at the end of a period because it is a permanent account. Instead, it maintains a balance and carries it forward to the next period to keep track of the company’s previous income and losses from prior years.
This is the main difference between permanent and temporary accounts. Temporary accounts are always closed at the end of an accounting period and start the next accounting period with a zero balance. Permanent accounts always maintain a balance and start the next period out with the ending balance from the prior period.