Balance sheet accounts are called real or permanent accounts because they continue to accumulate on the balance sheet from period to period for the life of the account.Examples of temporary accounts are sales and expenses. Income Statement accounts are called nominal or temporary accounts because income statement accounts are closed at the end of a reporting period to bring the balances to zero.Accountants can close accounts for any reporting period (e.g. Since we are reporting sales and expenses for January, for example, February sales and expenses should start with a zero balance to properly report sales, expenses, and net income only for the month of February. If the tax rate is 20% and the shop’s earnings before taxes is $15,000 ($100,000 – $30,000 – $12,000 – $40,000 – $3,000), the income tax would be $3,000.Closing entries made in the accounting cycle bring the income statement accounts to zero so that the new reporting period will start with zero balances. “Income Tax Expense”: This account would record the income tax on the shop’s earnings for the year.Suppose this adds up to $3,000 for the year. “Utilities Expense”: This account would track the cost of utilities like electricity and water.If the total wages for the year amount to $40,000, this would be recorded in this account. “Wages Expense”: This account would track the cost of paying employees.If rent is $1,000 a month, the total for the year would be $12,000. “Rent Expense”: This account would track the cost of renting the space for the coffee shop.For example, this might be $30,000 for the year. “Cost of Goods Sold (COGS)”: This account would track the cost of the coffee beans and other ingredients used to make the products sold.Let’s say the total for the year is $100,000.
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