Accounting Fundamentals Certification (AFC) Practice Test

In accounting, temporary accounts are those that are closed at the end of an accounting period to prevent them from carrying over to the next period. These include accounts that track revenues, expenses, gains, and losses, as they are used to measure performance over a specific time frame.

The capital account, such as Dawn Ovdaded, Capital, represents an owner's equity stake in the business and reflects the cumulative investments, withdrawals, and retained earnings of the owner. Since it tracks the owner's ongoing investment over time and is carried forward into subsequent periods, it is classified as a permanent account.

On the contrary, accounts like Repair Expense, Sales, and Interest Income are examples of temporary accounts. They reflect transactions that occur over a specific period, and their balances are reset to zero at the end of the accounting period when the income statement is prepared. This process allows businesses to measure and report financial performance periodically.

Understanding the distinction between temporary and permanent accounts is crucial in accounting as it affects how financial statements are prepared and how financial performance is reported over time.