Future Business Leaders of America (FBLA) Accounting Practice Test

What function do temporary accounts serve in accounting?

1. To summarize all accounts

2. To transfer information to the owner's capital account

3. To prepare permanent accounts for auditing

4. To maintain records for a full fiscal year

The correct answer is: To transfer information to the owner's capital account

Temporary accounts serve a specific purpose in the accounting cycle, primarily related to the tracking of revenues and expenses for a given accounting period. These accounts accumulate information over a single reporting period and are then closed at the end of that period. The primary function of temporary accounts is to facilitate the transfer of their balances to the owner's capital account, thereby reflecting the impact of the period's operations on the equity of the business. When a business closes its books at the end of an accounting period, temporary accounts—such as revenue, expense, and drawing accounts—are reset to zero, and their balances are transferred to the owner’s capital account. This process helps in accurately reflecting the company’s financial performance and ensuring that each accounting period starts fresh, allowing for a clear comparison between different periods. This mechanism is essential for producing periodic financial statements that illustrate the business’s performance over time, as it enables the owner and stakeholders to assess earnings and losses accurately for that specific period without the influence of prior results. Thus, the transfer of information to the owner’s capital account is a critical function of temporary accounts in the accounting process.