What are temporary accounts?

Temporary accounts are utilized to accumulate data for a specific accounting period. These accounts, such as revenues, expenses, and dividends, are closed at the end of each financial cycle to reset their balances to zero. This process allows for the systematic recording of financial performance for each period, ensuring that financial statements accurately reflect only the activities of that period without carrying over previous balances.

By closing temporary accounts, the accounting system enables the preparation of new financial statements that depict the financial status and performance for the new period. This mechanism is essential for tracking income and expenses separately for the respective periods, which contributes to clearer financial reporting and analysis.

The other options do not accurately describe temporary accounts. They either suggest indefinite longevity or relate to a narrower aspect of accounting, which does not capture the essence of how temporary accounts function within the broader context of financial reporting.