Final answer:
Permanent accounts track financial data over multiple periods and are not closed, featuring on the balance sheet, while temporary accounts track revenue, expenses, and dividends for a single period and are closed to start fresh in the next period. Both are essential for financial reporting and analysis.
Step-by-step explanation:
The difference between permanent accounts and temporary accounts lies in the duration over which they track transactions. Permanent accounts are used to track financial transactions over multiple accounting periods and are not closed at the end of the accounting period. They include assets, liabilities, and equity accounts, and are reported on the company's balance sheet. Examples of permanent accounts include a company's T-account, which shows assets on one side and liabilities on the other, and any equity that represents the net worth of the company.
On the other hand, temporary accounts record transactions for a single accounting period. These include revenue, expense, and dividend accounts; at the end of the accounting period, their balances are transferred to permanent accounts, specifically the retained earnings account, and then they are reset to zero. This process is known as closing the accounts, and it helps companies produce their income statement, which shows the performance over a specific period and resets for the future.
An accounting system includes both types of accounts because they serve different purposes in financial reporting. Permanent accounts provide a cumulative record of the company's financial position over time, while temporary accounts help track the company's performance and changes within a specific period, which is crucial for financial analysis and decision-making.