temporary account
(noun)
an account that is closed at the end of the period to be made a permanent account
Examples of temporary account in the following topics:
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The Post-Closing Trial Balance
- The purpose of closing entries is to transfer the balances of the temporary accounts (expenses, revenues, gains, etc.) to the retained earnings account.
- After the closing entries are posted, these temporary accounts will have a zero balance.
- When the post-closing trial balance is run, the zero balance temporary accounts will not appear.
- However, all the other accounts having non-negative balances are listed, including the retained earnings account.
- The post-closing trial balance differs from the adjusted trial balance in only two important respects: It excludes all temporary accounts since they have been closed, and it updates the retained earnings account to its proper ending balance.
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Closing the Cycle
- Transferring information from temporary accounts to permanent accounts is referred to as closing the books.
- The process of closing the temporary accounts is often referred to as closing the books.
- Closing the revenue accounts—transferring the balances in the revenue accounts to a clearing account called Income Summary.
- Closing the Income Summary account—transferring the balance of the Income Summary account to the Retained Earnings account (also known as the capital account).
- Closing the Dividends account—transferring the balance of the Dividends account to the Retained Earnings Account
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Dealing with Foreign Currency and Bad Debts
- To deal with foreign currency and bad debts, we have a "gain or loss" account and methods to measure the net value of accounts receivable.
- To deal with bad debts, companies have two methods available to them for measuring the net value of accounts receivable, which is generally computed by subtracting the balance of an allowance account from the accounts receivable account.
- The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
- The allowance for bad debt/doubtful accounts is a permanent account.
- While the corresponding bad debt expense account is a temporary account that is zeroed out annually.
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Overview of Income Tax Accounting
- In order to properly account for income taxes, it is important to understand that the Internal Revenue Service code that governs accounting for tax liability isn't the same as the generally accepted accounting principles (GAAP) for reporting tax liability on the financial statements.
- Temporary difference: The book income (income shown on the company financials) may be higher one year, but lower in future years.
- In this method, the deferred income tax amount is based on tax rates in effect when the temporary differences originated.
- This method seeks to properly match expenses with revenues in the period the temporary difference originated.
- Summarize how to account for deferred taxes under the deferred method and the asset-liability method
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Write-Offs
- When a sale is made on account, revenue is recorded along with account receivable.
- The portion of the account receivable that is estimated to be not collectible is set aside in a contra-asset account called Allowance for Doubtful Accounts.
- The credit is to the Accounts Receivable control account in the general ledger and to the customer's account in the accounts receivable subsidiary ledger.
- Debiting the allowance account and crediting Accounts Receivable shows that the firm has identified Smith's account as uncollectible.
- If the company wrote off any uncollectible accounts during 2009, it would debit Allowance for Uncollectible Accounts and cause a debit balance in that account.
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Valuing Accounts Receivable
- These uncollectible accounts are called bad debts.
- Recognizing the bad debt requires a journal entry that increases a bad debts expense account and decreases accounts receivable.
- Under the allowance method, an adjustment is made at the end of each accounting period to estimate bad debts based on the business activity from that accounting period.
- Accounts receivable is a control account that must have the same balance as the combined balance of every individual account in the accounts receivable subsidiary ledger.
- Since the specific customer accounts that will become uncollectible are not yet known when the adjusting entry is made, a contra-asset account named allowance for bad debts, which is sometimes called allowance for doubtful accounts, is subtracted from accounts receivable to show the net realizable value of accounts receivable on the balance sheet.
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Objectives of Accounting
- The Financial Accounting Standards Boards Statements of Financial Accounting Concepts No. 1 states the objective of business financial reporting, which is to provide information that is useful for making business and economic decisions.
- With these objectives in mind, financial accountants produce financial statements based on the accounting standards in a given jurisdiction.
- Generally Accepted Accounting Principles refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or Standard accounting practice.
- They are progressively replacing the many different national accounting standards.The rules to be followed by accountants to maintain books of accounts which is comparable, understandable, reliable and relevant as per the users internal or external.
- Describe the objectives of accounting, distinguishing between Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS)
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Recognizing Notes Receivable
- In accounting, notes receivables are accounts to keep track of accrued assets that have been earned but not yet received.
- In accounting, notes receivables are accounts to keep track of accrued assets that have been earned but not yet received.
- To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account.
- Companies have two methods available to them for measuring the net value of accounts receivable, which is generally computed by subtracting the balance of an allowance account from the accounts receivable account.
- The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
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Expense Recognition
- Expense recognition is an essential element in accounting because it helps define how profitable a business is in an accounting period.
- In terms of the accounting equation, expenses reduce owners' equity.
- An important issue in accounting is when to recognize expenditures.
- Generally, cash basis accounting is reserved for tax accounting, not for financial reports.
- Most financial reporting in the US is based on accrual basis accounting.
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Activities to Manage Receivables
- The accounts receivable departments use the sales ledger.
- Collections and cashiering teams are part of the accounts receivable department.
- To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account.
- The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
- The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.