State BPA Fundamental Accounting Practice Exam

What is an example of a permanent account?

1. Revenue account

2. Temporary account

3. Prepaid insurance

4. Expense account

The correct answer is: Prepaid insurance

A permanent account is one that maintains its balance across accounting periods and is carried forward into the next period. This means that the balances in these accounts accumulate over time as opposed to being closed at the end of each accounting period. Prepaid insurance is an example of a permanent account because it represents an asset that will provide future economic benefits over time. The amount paid for the insurance is recorded as an asset until the insurance coverage is used up, at which point it will be recognized as an expense. In contrast, revenue accounts, temporary accounts, and expense accounts typically close at the end of the accounting period, and their balances do not carry over to the next period. Revenue accounts accumulate amounts earned during the period, while temporary accounts capture specific transactions that ultimately reset to zero at the beginning of the next period. Expense accounts track costs incurred within a specific timeframe and also reset upon the closure of the period. Therefore, they do not exemplify permanent accounts.