Balance Sheet Accounts and Income Statement Accounts
Balance sheet accounts carry an opening balance from year to year. Expense and income accounts collect one year and are closed to profit and loss.
Updated
Balance sheet accounts
Asset, liability and equity accounts come from the balance sheet. They start the year with the opening balance and end with a closing balance that is carried forward to next year. That is why they are also called permanent or real accounts.
Income statement accounts
Expense accounts (rent, wages, purchases, depreciation) and income accounts (sales, interest received) record one period. They start every year at zero and are closed to the profit and loss account at year end, so they are also called temporary or nominal accounts.
Expenses reduce equity, so they are debits. Income increases equity, so it is a credit. The balance on the profit and loss account is the profit or loss for the year, which is transferred to equity.
Closing the accounts
| Account | Closed to | Entry (example) |
|---|---|---|
| Expense | Profit and loss | Dr P&L, Cr Rent |
| Income | Profit and loss | Dr Sales, Cr P&L |
| Profit and loss (profit) | Equity / retained earnings | Dr P&L, Cr Retained earnings |
| Assets and liabilities | Carried forward | Closing balance becomes next year’s opening balance |
Example: sales of £80,000 and total expenses of £65,000. The profit and loss account shows £80,000 on the credit side and £65,000 on the debit side; the £15,000 balance is the profit and is transferred to equity.
Check yourself
Which of these accounts has an opening balance?
More on accounting
Typical exam mistakes
- Carrying expenses forward to next year: expense and income accounts start at zero every year.
- Forgetting to transfer the profit to equity: then the balance sheet does not balance.
- Mixing up the closing entries: expenses close with Dr P&L, income with Cr P&L.
Your turn
Three transactions from the journal entry trainer: choose the accounts, enter the amounts and check.
Transaction
The bank credits us with £45.00 of interest.
Debit
Assets up · expenses · liabilities down
Total debit£0.00
Credit
Liabilities up · income · assets down
Total credit£0.00
Frequently asked questions
Why are expenses debits?+
Because they reduce equity, and equity decreases on the debit side.
Are drawings an expense?+
No. Drawings reduce equity directly and are not part of profit or loss.