A temporary account is an account that is used to hold funds temporarily during an accounting period and is cleared at the end of the period to distribute those funds to appropriate permanent accounts, also known as “real accounts.” Companies of various sizes use temporary accounts to hold money for numerous different purposes. They are administered by accounting staff like other accounts and records are kept to document account activity so that taxes and other filings can be filled out appropriately.
Also known as a nominal account, a temporary account can be used to hold revenues, expenses, dividends, and other types of funds. When an accounting period is over, the account is emptied in a process known as closing. With the movement of the funds, accounting entries can be made to document the amounts and their sources. Distributing funds out of the temporary account brings the balance back down to zero to prepare it for the next accounting period.
Tracking accounts in this way can be beneficial for a number of reasons. Accountants may find it easier to keep track of financial activity over a given accounting period if they can consolidate funds in a single temporary account. Likewise, information can be given to people to deposit funds in such accounts without having to worry about giving them access to real accounts where assets and funds being held in the long term are stored.
As with other bank accounts, statements will be issued periodically to provide information about account activity, funds on deposit, and other important data. Statements are reviewed carefully to confirm that they match internal records and to look for any signs of abnormal or questionable activity. Keeping accounts dedicated to specific purposes can make it easier to identify unauthorized account activity.
Temporary accounts can be established by arrangement with a bank. Services offered with such accounts vary, depending on the bank, the size of the account, and the company involved. It is important to make banks aware of the purpose of the account so that they do not suspect fraudulent activity when the account is filled over the course of the accounting period and then emptied out.
Contents of a temporary account are covered by insurance, just like real accounts. There is a deposit insurance limit and the contents of such accounts count towards this limit. Concerns about the safety of deposits can be brought up with accountants, who may have suggestions for keeping accounts safe and accessible.