Why do temporary accounts need to be closed at end of year?
submitted by Ophelia Payne

dalia

We close temporary accounts because they only record stuff for the current year. If we didn't close them, their balances would carry over into the next year, which would mess up our financial statements and make it look like we earned or spent more than we actually did.

quentin

Temporary accounts need to be closed so they don't keep adding up forever. At the end of the year, we clear out all the revenues and expenses and move the net result to a permanent account, like retained earnings, so the new year starts with a clean slate.

smelly hound

It's all about tracking progress. It's easier to monitor a company's financial state when it's broken down into pieces.

Think about if you didn't close the books out. Say you had a great year last year, but this year isn't going so swell. You wouldn't know it because you have all this money on the books from last year. On the other hand, if you close out the books and basically say, "That was last year. Now we're moving on." You can keep the two separate. You throw your old earnings in retained earnings. Great. You still have that money to work with, but it's not cluttering up this year's records. Now you can see clearly each month how your income and expenses are adding up for the current year. It helps you see what's going on.