Question

The balances of the accounts reported on the income statement are not carried forward from year to year. Also, the balance of the owner's drawing account, which is reported on the statement of owner's equity, is not carried forward. Because these accounts report amounts for only one period, they are called ________________________________

Answer 1

The balances of the accounts reported on the income statement and the owner's drawing account are not carried forward from year to year. They are called temporary accounts.

Step-by-step explanation:

The balances of the accounts reported on the income statement are not carried forward from year to year. Also, the balance of the owner's drawing account, which is reported on the statement of owner's equity, is not carried forward. Because these accounts report amounts for only one period, they are called temporary accounts. The balances of the accounts reported on the income statement are not carried forward from year to year. Also, the balance of the owner's drawing account, which is reported on the statement of owner's equity, is not carried forward. Because these accounts report amounts for only one period, they are called temporary accounts. The income statement includes items such as revenues and expenses, which are reset at the beginning of the new fiscal year after the closing process.

The idea is that income statement accounts reflect only the results of operations for the current accounting period. Similarly, the owner's drawing account is also a temporary account; it tracks the withdrawals made by the owner during the year and is closed out to the owner's capital account at the end of the accounting period. Understanding the nature of temporary accounts is essential for accurate financial reporting and for maintaining the integrity of financial statements. Items like dividends from stocks and interest from bonds, as mentioned in the provided reference materials, would also be recorded in the income statement and thus be part of the temporary accounts that are not carried over into subsequent years.

Answer 2

Nominal or temporary accounts are used to record transactions during a fiscal year and their balances are not carried forward to the next period. At the end of the year, these accounts are closed to the capital account, resetting their balances to zero for the new period. In contrast, balances in permanent or real accounts are carried forward year to year.

Step-by-step explanation:

The accounts you are referring to, which report amounts for only one period and are not carried forward from year to year, are termed nominal accounts or temporary accounts. These include all income statement accounts such as revenue, expense accounts, and also the owner's drawing account found in the statement of owner's equity. At the end of each fiscal year, their balances are closed to the capital account to reflect the changes in the owner's equity resulting from the period's profits or losses.

This process is known as closing the books. The balances in nominal accounts are reset to zero to begin the new accounting period afresh, ensuring that the income statement only reflects the income, expenses, gains, and losses of the current period. In contrast, permanent accounts, also known as real accounts, such as assets, liabilities, and the capital itself, are not closed at the end of the accounting period; their balances are carried forward to the next period.