What is the difference between temporary and permanent accounts?

• A. Temporary accounts carry over to the next period; permanent accounts are closed each period.
• B. Temporary accounts are closed to zero each period; permanent accounts carry over to the next period.
• C. Temporary accounts include assets and liabilities; permanent accounts include revenues and expenses.
• D. Temporary accounts are permanent; permanent accounts are temporary.

Answer: (B)

Temporary accounts are used to track activity for a specific period, such as revenues, expenses, and dividends. At the end of the period, these accounts are closed to zero so the next period starts with a clean slate; the net result of revenues minus expenses (and any dividends) is transferred to retained earnings. Permanent accounts, on the other hand, reflect ongoing balances like assets, liabilities, and most equity accounts, and they carry their ending balances into the next period without being closed. This combination—closing temporary accounts to zero and carrying forward permanent accounts—explains why temporary accounts reset each period while permanent accounts persist.