What is Temporary Account?
A temporary account (nominal account) is an income statement account that tracks revenue, expenses, and drawings for a single accounting period and is closed to zero at period end.
Definition
A temporary account, also known as a nominal account, is a general ledger account that is used to record transactions for a specific accounting period only. Temporary accounts accumulate data for one period and are then closed — meaning their balances are transferred to permanent accounts and reset to zero — so they can start the next period fresh. This category includes all income statement accounts: revenue accounts, expense accounts, and withdrawal (or dividend) accounts.
The Three Types of Temporary Accounts
Revenue accounts track income from services or products rendered during the period. Examples include Service Revenue, Consulting Revenue, and Sales Revenue. Expense accounts track costs incurred during the period. Examples include Rent Expense, Utilities Expense, Office Supplies Expense, and Advertising Expense. Withdrawal or Dividend accounts track money taken out of the business by the owner (for sole proprietorships and partnerships) or dividends paid to shareholders (for corporations). All three types begin each accounting period with a zero balance.
The Closing Process for Temporary Accounts
The closing process has four steps: First, close all revenue accounts by debiting each revenue account and crediting the Income Summary account. Second, close all expense accounts by crediting each expense account and debiting the Income Summary account. Third, close the Income Summary account to the appropriate equity account — for sole proprietorships this is the owner's capital account. Fourth, close withdrawal/dividend accounts to the owner's capital account. After these four steps, all temporary accounts have zero balances and the permanent accounts retain their updated balances.
Why the Closing Process Matters
The closing process serves three essential purposes. It ensures each accounting period starts with a clean slate, so only the current period's transactions are captured in the temporary accounts. It accurately transfers net income or net loss to the equity section of the balance sheet through the Income Summary account. It produces the Retained Earnings statement for corporations, which shows how net income was either added to or reduced from retained earnings. Without closing entries, financial statements would incorrectly mix current period results with prior period amounts.
Temporary Accounts for Freelancers
As a freelancer, your temporary accounts are the revenue and expense accounts in your income and expense reports. Revenue accounts like Consulting Income or Design Fees are temporary — their balances reset each month or year. Expense accounts like Software Subscriptions or Travel Expense are also temporary. The net difference (revenue minus expenses) represents your net income or net loss for the period. If you operate as a sole proprietorship, your draws from the business are tracked in a Draw account (also temporary). Using Eonebill, your income is automatically categorized into the appropriate revenue accounts each time you send an invoice.