RSM220H1 Study Guide - General Ledger, Capital Account, Trial Balance
20 Apr 2012
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Revenue and expense accounts are called temporary accounts because at the end of each accounting period, the balance in both accounts are reduced to zero. This allows the accounts to begin fresh with a zero balance for the next accounting period. Revenue less expense determines if the company has made a profit or incurred a loss. Permanent accounts carry their balances from one accounting period to another (e. g. assets, liabilities & owner"s equity). They are not closed at the end of the accounting period but their balances are carried forward. The revenue and expense accounts gives us the profit or loss. This amount is used to complete the balance sheet by updating the capital account. The closing entries update the capital account in the ledger. To close the revenue and expense accounts their balances are transferred to the income summary account. The credit balance in the income summary account tells us that a net income was earned.
