Chapter Four

Temporary Accounts

In times of universal deceit, telling the truth will be a revolutionary act.

George Orwell

This fourth article will highlight the revenue and expense accounts.  These accounts are considered sub- accounts of net assets/owners’ equity.  In addition, these are called temporary accounts because they are closed out (zeroed out) at the close of an accounting period.  The sources and uses of funds statement also called the profit and loss statement are prepared utilizing these temporary accounts.  The net asset/owners’ equity account on the balance sheet is adjusted as well.

Sub- accounts provide a record of where income is coming from and where expenses are being booked.  This avoids the necessity to adjust the net asset/owners’ equity account continuously since only one adjustment is required at the end of the accounting period.  If the entries for revenue and expense were booked to the net asset account as they occurred the sub-accounts would lose their identify  Also, by creating these sub-accounts it is possible to prepare an income statement which is sometimes called a Profit and Loss statement.

As we mentioned previously, the revenue and expense accounts are sub-accounts of net assets.  The revenue account is under the net assets account.  Revenue has the same characteristics as the net asset account therefore, debits decrease the balance, and credits increase the balance.  Take for example $100 (revenue) being collected from the offertory collection (Debit assets which is an increase and it is offset by a credit which is an increase in the temporary revenue accounts.

On the other hand, let us discuss the booking of expenses.  For our example, consider using $100 cash to purchase candles.  The cash account, which is a permanent account, is reduced by a credit.  This would be a $100 credit in Cash (Cash is reduced) and the temporary account of Candle expense debited or increased by the same amount.  The debit equals the credits shows up again.  The issue is that the expense in a temporary sub-account of the net asset account.  Just as in the net asset, account debits are reductions and credits are additions.

SUMMARY

Temporary accounts or sub-accounts are accounts under the net asset account so they belong on the right side of the balance sheet.  Therefore, these accounts have the same conventions as net assets/owners’ equity.  This means that debits reduce and credits increase the accounts on the right side of the balance sheet Liabilities and net assets/owners’  equity.  Alternatively, put another way debits decrease the balance of the accounts and credits increase. 

Temporary accounts must be closed out or reset to zero at the end of every accounting period.  These adjustments are accomplished by using a “closing worksheet” which is used for the preparation of the net assets statements and balance sheet.  Permanent accounts such as Cash are not zeroed out and they begin the next accounting period with the balance remaining at the close of the previous accounting period.

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