Which is NOT a temporary account?A. Interest incomeB. Rent incomeC. Interest expenseD. Sales returns & allowancesE. Inventory

Temporary accounts must be closed at the close of every accounting period; these include revenue, expense and withdrawal accounts. Inventory remains an open account as its balance carries forward into subsequent accounting periods.

Supplemental Knowledge:

In accounting, accounts are classified into two main categories: temporary and permanent accounts.

1. Temporary Accounts:
These accounts are designed to record transactions for a specific accounting period and consist of revenue, expense and dividend accounts. At the conclusion of an accounting period, any unutilized balances in temporary accounts (typically retained earnings) are transferred through closing entries into permanent ones such as retained earnings - examples include interest income, rent income, interest expense or sales returns and allowances.

2. Permanent Accounts:
Permanent accounts carry their balances into each accounting period; examples include asset, liability and equity accounts. They do not close at the end of a period but continue their balances without closing; examples may include inventory cash accounts receivable retained earnings etc.

Life in Context:

Imagine you run a small business:
- Temporary Accounts: Throughout the year, you track your revenues (like sales income) and expenses (like rent or utilities). At year-end, you close these temporary accounts to see your net profit or loss for that year. This helps reset these accounts for tracking in the new year.
- Permanent Accounts: Your business's assets (like inventory), liabilities (like loans), and equity remain on your books continuously. For instance, if you have unsold inventory at year-end, it carries over into the next year’s balance sheet.

Understanding the difference between temporary and permanent accounts is crucial for accurate financial reporting and analysis. At UpStudy, we offer tools and resources that make learning these essential accounting concepts straightforward and engaging.

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