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What Is a Temporary Account?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 06 April 2014
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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.

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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.

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Discuss this Article

KaBoom
Post 4

@indemnifyme - The way your agency uses the temporary account makes a lot of sense. I'm sure it's easier for the insurance company to do their accounting when the deposit/transfer is made to their account weekly instead of every day.

I think it's a little funny the insurance company doesn't give access to their main account to the agents. I guess it doesn't hurt to protect yourself though!

indemnifyme
Post 3

@MrSmirnov - I work at a small insurance agency and we do have a temporary account. During the day we collect payments from our customers on behalf of the insurance company. At the end of the day the agent closes out and then make a deposit of the money into the temporary account by a certain time the next day. Every week the payments are then transferred to the insurance company's account.

I think we do have a specific arrangement with the bank to let them know the account is for that purpose though. If we didn't I feel sure they would suspect fraud just like the article said!

wander
Post 2

Do bank charge extra fees for the privilege of having a temporary account? Can any bank account be made to be temporary?

I wonder if individuals could make use of a temporary account if they have numerous investments and payments to think about. I often have money coming in from different sources and sometimes I no longer want that person to have my account number. Usually I just end up closing my account and making a new one, but it seems like temporary accounts would be a better way to go.

Are there any benefits for having a temporary account? Is it really better than just having a regular account you occasionally close?

MrSmirnov
Post 1

Even if you have a small business setting up a temporary account can be a good idea for receiving and holding payments from customers. For security reasons I make sure to have a temporary account set up so that I can change my account number quarterly.

One of the best reasons to have a temporary account is that it makes record keeping easier and keeps your main account numbers secret. For myself I allow customers to pay online through bank transactions so it feels safer to me if your account numbers can be routinely changed. Funds are distributed from my temporary account to all other applicable accounts once a month.

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