Question

Explain why temporary accounts are closed each period.

Answer 1

Revenue and expense are considered as temporary accounts.

Temporary accounts are closed each period only under accrual basis of accounting.

Under accrual basis of accounting revenues and expenses are recognised in the period in which they are incurred irrespective of whether cash is received or not (ie. Revenue) and whether cash is paid or not (ie. Expense).

The revenue and expense accounts should be closed in the period in which the transaction took place under accrual basis of accounting.

Recognise the revenues and expenses in the period in which the transaction took place and close those revenue and expense accounts in the same period under accrual basis of accounting.