Final answer:
Permanent accounts carry balances into future periods and include asset, liability, and equity accounts. Temporary accounts accumulate data for a single accounting period, including revenues and expenses, and are reset to zero at year-end. An accounting system uses both to report accurate financial status and track periodic results.
Step-by-step explanation:
Difference Between Permanent and Temporary Accounts
The difference between permanent accounts and temporary accounts is central to the structure of an accounting system. Permanent accounts, also known as real accounts, are the accounts that carry forward their ending balances from one accounting period to the next. Their balances are not closed at the end of the accounting year but are carried forward to the next period. Examples include assets, liabilities, and equity accounts.
On the other hand, temporary accounts, also referred to as nominal accounts, are used to gather information for a single accounting period. They include revenue, expense, and dividend accounts. At the end of the year, balances from temporary accounts are transferred to a permanent equity account, such as retained earnings, and their balances are then reset to zero ready for the next accounting period.
An accounting system includes both types of accounts to ensure accurate financial reporting. Permanent accounts provide the ongoing financial status of the company, while temporary accounts track the financial results over a specified period, allowing for the preparation of accurate income statements and the calculation of retained earnings for the balance sheet.