A temporary account is also a part of the general account and is an account that commences each accounting year with zero balance. As the accounting year draws to a close, the balance in the account is transferred to another account known as closing the account. Sales account can be thought of as a Temporary account. It is used to keep a record of the sales transpiring only in the existing year. Once the sales for the accounting year have been booked, the balance in the sales account is transferred or closed to another account. So, the account balance will then become zero.
All the income statement accounts such as revenues, expenditures, profit and loss are included in the temporary account. Once the amount for the current accounting year have been recorded in the financial statement, the amounts in the temporary accounts are transferred to a permanent account such as a company’s retained revenues account or in a sole owner’s capital account. In a manual accounting system, the amounts in the temporary accounts are transferred to an income summary account. The income summary account is then transferred to retained earnings or to the owner’s capital account. So, this account also turns out to be a temporary account.
A temporary account that is not the income statement account is the owner’s drawing account. The amount in the owner’s drawing account is directly transferred to the proprietor’s capital account and is not recorded in the income statement or even in an income summary account.
Nominal account is another name assigned to temporary accounts.