What is a temporary account?

A temporary account refers to an account that is used to accumulate balances for a specific period of time and is reset to zero at the end of that period. This resetting occurs through a closing process, which typically involves transferring the balances to permanent accounts. The purpose of temporary accounts is to track financial performance over a specific period, such as revenues, expenses, gains, and losses, which are accounted for during the fiscal year.

For example, revenue accounts accumulate total earnings generated by a business throughout the year, and expense accounts track the costs incurred. At the end of the accounting period, these temporary accounts are closed, and their balances are transferred to the retained earnings account in the equity section of the balance sheet, thereby resetting them for the next accounting period.

The other options do not accurately define temporary accounts:

• The first option describes permanent accounts, which accumulate balances over multiple periods rather than being closed.
• The third option could imply that temporary accounts are excluded from the balance sheet, but in reality, their balances are transferred and reflected in the permanent accounts after closing.
• The fourth option refers to liabilities and obligations, which are usually categorized as permanent accounts rather than temporary accounts.

Thus, defining a temporary account as one that is closed at the end of