State BPA Fundamental Accounting Practice Exam

What does it mean if an account is "temporary" in accounting?

1. It is closed at the end of a fiscal year

2. It can only hold a specific amount

3. It is always tied to assets

4. It cannot be opened again

The correct answer is: It is closed at the end of a fiscal year

In accounting, a temporary account is designed to accumulate balances only for a specific accounting period, typically a fiscal year. At the end of that period, these accounts are closed or "zeroed out" to begin the new accounting period with a fresh start. This process is essential for maintaining accurate records of income and expenses, which are reported on the income statement for that period. By closing the temporary accounts, a business can ensure that its financial statements reflect only the activities of the current period, rather than carrying forward transactions from prior periods. This is a key aspect of the accounting cycle and helps maintain clarity in financial reporting. Temporary accounts include revenue, expense, and dividend accounts. After closing, the net balance is transferred to retained earnings, which is a permanent account. Thus, understanding the nature of temporary accounts is crucial for anyone studying accounting, as it defines how financial performance is tracked and reported over time.