is common stock a temporary account?

Quick answer and overview

is common stock a temporary account? No — common stock is not a temporary account. It is a permanent shareholders’ equity (balance-sheet) account. Unlike temporary (nominal) accounts, which are closed to retained earnings or an income summary at period end, common stock carries a balance across reporting periods and is not reset to zero during closing.

This article explains why is common stock a temporary account is the wrong assumption, defines temporary and permanent accounts, shows how period-end procedures treat equity, walks through typical journal entries, and gives practical examples and FAQs that are useful for beginners, analysts, and investors. You will also find how equity transactions interact with temporary accounts such as dividends and net income, and where to look in financial statements for disclosures.

截至 2026-01-15，据 AccountingTools 报道，公司财务核算和会计准则持续将普通股（common stock）归类为股东权益类永久账户，并在资产负债表中披露授权、已发行和在外流通股份数等信息。

Definitions

Common stock

Common stock represents the basic ownership interest in a corporation. Holders of common stock generally have residual claim to assets after liabilities and preferred claims are satisfied, and commonly have voting rights on key matters such as electing the board of directors. In accounting records, common stock is often represented by ledger accounts such as:

• Common Stock (reflecting par value multiplied by shares issued at par)
• Additional Paid-in Capital (APIC) or Paid-in Capital in Excess of Par (reflecting amounts received above par value)

Common stock is an equity account, showing the financing provided by owners through the purchase of shares.

Temporary (nominal) accounts

Temporary accounts accumulate financial activity for a single accounting period and are closed (reset to zero) at the end of that period so that the next period starts clean. Typical temporary accounts include:

• Revenue and sales accounts
• Expense accounts (salaries, rent, depreciation expense, etc.)
• Gains and losses from nonoperating items
• Dividends (or drawings for noncorporate entities), depending on presentation

At the period-end closing process, temporary accounts are typically closed to retained earnings (or to an income summary account first, then to retained earnings) so net income or loss for the period is transferred to equity.

Permanent (real) accounts

Permanent accounts carry their ending balances into the next accounting period. They are not closed at period end. Common examples:

• Assets (cash, accounts receivable, property, plant, and equipment)
• Liabilities (accounts payable, long-term debt)
• Equity (common stock, additional paid-in capital, retained earnings)

Because permanent accounts form the basis of the balance sheet, their balances represent the company’s financial position at a point in time.

Accounting classification of common stock

Common stock is classified as shareholders’ equity on the balance sheet. That classification makes it a permanent account by definition. When a business issues shares, the accounting entries increase equity accounts and possibly cash or noncash assets. Those equity balances remain on the books until further transactions change them (for example, new issuances, buybacks, stock dividends, or conversions).

For clarity: the question is common — is common stock a temporary account — but the correct classification under GAAP and IFRS is permanent equity. This is consistent across standard accounting guidance and textbooks.

How closing and period-end procedures treat common stock

The standard closing cycle focuses on temporary accounts. A simplified closing flow is:

1. Close revenue accounts to an income summary (or directly to retained earnings).
2. Close expense accounts to the income summary.
3. Close the income summary to retained earnings (resulting in net income or loss moving into retained earnings).
4. Close dividends (if recorded in a separate temporary dividends account) to retained earnings.

During this cycle, common stock and other equity accounts are not closed. They remain on the balance sheet with their balances carried forward. The distinction matters because closing temporary accounts produces the period’s reported net income and allocates that result to retained earnings; common stock represents owner-supplied capital and should not be reset.

Why is this distinction important? If common stock were incorrectly treated as temporary and closed each period, shareholders’ equity would be misrepresented and investors could not track capital contributions over time.

Typical journal entries involving common stock

Below are common journal entries that affect Common Stock and related equity accounts. These entries are persistent and are not closed at period end.

1) Issuance of shares for cash (par value model)

Scenario: A company issues 1,000 shares with a par value of $1 per share for $10 per share cash.

Journal entry (conceptual):

• Debit Cash $10,000
• Credit Common Stock $1,000 (1,000 shares × $1 par)
• Credit Additional Paid-in Capital $9,000 (difference between cash received and par value)

This increases the permanent accounts Common Stock and APIC and the asset Cash. These credits are not closed at period end and remain as part of shareholders’ equity on the balance sheet.

2) Issuance of no-par shares

If shares are no-par, the full proceeds may be credited to Common Stock or to Common Stock and APIC depending on jurisdiction and company policy. The result is still an equity increase that carries forward.

3) Issuance for noncash consideration

If shares are issued for assets (e.g., equipment) or services, the company debits the asset or an expense (depending on the transaction) and credits Common Stock and APIC for fair value, again increasing permanent equity accounts.

4) Treasury stock (repurchase of shares)

When a company buys back its own shares, it records treasury stock. Treasury stock is usually recorded as a contra-equity account that reduces total shareholders’ equity. Example (purchase of treasury shares for cash):

• Debit Treasury Stock (contra-equity) for purchase cost
• Credit Cash

Treasury stock balances remain until reissued or retired. They are permanent in the sense they carry forward as part of equity, though they reduce total equity.

5) Stock dividends and stock splits

• Stock dividends: A transfer is made from retained earnings to common stock (and often to APIC for amounts above par). This is a reclassification within equity, not a closing entry. It affects retained earnings (a permanent account) and common stock.
• Stock splits: Generally disclosed and adjusted in share counts and par value per share (if applicable). Stock splits are usually treated as a memorandum or disclosure change; they do not involve a closing entry.

Related equity transactions and their treatment

• Treasury stock is a contra-equity account and reduces total equity; it is not a temporary account.
• Stock dividends reclassify retained earnings into common stock and APIC; this is a permanent reclassification, not a closure.
• Stock splits increase the number of shares outstanding (and usually lower par value if applicable) but do not change total equity; they are not a part of the closing process.

Interaction with temporary accounts (dividends and net income)

A common area of confusion is how dividends and net income move between temporary and permanent accounts.

• Net income is derived from temporary revenue and expense accounts. At period-end, revenues and expenses are closed and the resulting net income or loss is transferred into retained earnings (a permanent equity account). The closing process ensures retained earnings reflects cumulative earnings.

• Dividends may be recorded in a temporary Dividends account (or directly reduce retained earnings depending on accounting system). When dividends are recorded in a temporary account, that account is closed to retained earnings at period end, reducing retained earnings. Common stock itself is not reduced by the closing of dividends; instead, dividends reduce retained earnings or are paid out in cash (or other assets).

To restate: if you wonder whether is common stock a temporary account because dividends appear to reduce owners’ equity, remember dividends typically reduce retained earnings, not the common stock ledger balance. Common stock remains as the historical amount of capital contributed by owners (unless reclassified or retired).

Presentation in financial statements

Where to find common stock and what disclosures to expect:

• Balance sheet (statement of financial position): Common stock is presented in the shareholders’ equity section. It is shown alongside additional paid-in capital, retained earnings, treasury stock (if any), accumulated other comprehensive income, and total equity.

• Statement of changes in equity (or a combined statement that includes equity reconciliations): Provides a rollforward of equity accounts showing beginning balances, transactions during the period (issuances, repurchases, net income, dividends, stock-based compensation, other transfers), and ending balances.

Typical disclosures include:

• Par value per share (if applicable)
• Number of authorized, issued, and outstanding shares
• Changes in share counts during the period
• Rights and restrictions associated with classes of stock

Under GAAP and IFRS, these disclosures help users reconcile changes in equity and verify that common stock balances are permanent and not subject to the periodic closing of nominal accounts.

Practical examples and brief walkthroughs

Example 1 — Cash issuance with par value (concise):

• Company issues 1,000 shares, par $1, proceeds $10 per share.
  • Debit Cash $10,000
  • Credit Common Stock $1,000
  • Credit Additional Paid-in Capital $9,000

After period end, revenue and expense accounts are closed, net income transfers to retained earnings, but Common Stock remains $1,000 and APIC remains $9,000 on the balance sheet. This shows that is common stock a temporary account is false: the balance persists.

Example 2 — Stock dividend (10% stock dividend):

• A company with 10,000 shares outstanding declares a 10% stock dividend.
• 1,000 additional shares are issued as a dividend. If par is $1, then Common Stock increases by $1,000 and Retained Earnings decreases by $1,000 (or by the fair value if large dividend rules apply). This is a reclassification between equity accounts and is not a temporary closing entry.

Example 3 — Treasury stock buyback:

• Company repurchases 500 shares at $15 per share.
  • Debit Treasury Stock $7,500
  • Credit Cash $7,500

Treasury stock reduces equity and remains on the balance sheet until reissued or retired.

Common misconceptions and FAQ

Q: is common stock a temporary account and closed at year-end? A: No. Common stock is a permanent equity account on the balance sheet and is not closed at year-end.

Q: Are equity accounts temporary? A: Most equity accounts (common stock, APIC, retained earnings) are permanent. Some equity-related accounts like Dividends may be temporary if recorded separately and closed to retained earnings.

Q: How do stock dividends affect account types? A: Stock dividends reclassify amounts within equity (retained earnings to common stock/APIC) and do not involve closing common stock. They are permanent reclassifications.

Q: Does a stock split require a closing entry? A: No. Stock splits change share count and may change par value; they are generally disclosed and do not require a closing entry.

Q: If a company pays dividends, does that change common stock? A: Generally no. Dividends reduce retained earnings (or cash if paid), not the common stock account, unless shares are retired as part of the transaction.

Implications for investors and analysts

Recognizing that common stock is a permanent account matters for several reasons:

• Ratio analysis: Equity balances (common stock and APIC) influence book value per share and leverage ratios. Accurate, persistent balances ensure consistent ratio calculations.

• Capital structure assessment: Common stock balances reflect owner-supplied capital. Analysts use changes in common stock and APIC to understand capital raises.

• Trend analysis: Because common stock is permanent, changes between periods (issuances, buybacks, dividends) show financing decisions, not routine monthly closings.

• For valuation and per-share metrics: Knowing shares issued and outstanding (disclosed with common stock) is essential for EPS, book value per share, and market capitalization comparisons.

References and sources

• AccountingCoach — explanations of temporary vs permanent accounts and the closing process.
• AccountingTools — guidance on equity accounts and journal entries for share issuance and treasury stock.
• Numeric / SaasAnt / HighRadius materials — practical walkthroughs of journal entries and accounting software postings.

截至 2026-01-15，据 AccountingTools 报道，上述会计分类与期末处理在主流会计教材和实践中保持一致。

Practical tips and next steps

• If you are reconciling a company’s books and you ask is common stock a temporary account, treat common stock as permanent and trace any movements to equity transactions (issuances, buybacks, dividends).

• For hands-on accounting or bookkeeping, ensure your closing routine only affects revenue, expense, and temporary dividend accounts — do not include common stock in closing entries.

• For investors assessing a company, check the statement of changes in equity and balance sheet notes for par value, authorized/issued/outstanding shares, and reconcile those to share count used in per-share calculations.

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Short checklist (for accountants and reviewers)

• Confirm common stock appears in shareholders’ equity on the balance sheet.
• Verify closing entries only involve temporary accounts (revenues, expenses, dividends if separate).
• Reconcile share issuance journal entries to cash or asset increases and to APIC where applicable.
• Review disclosures for authorized, issued, and outstanding shares and par value details.

Final note — why this matters for reliable reporting

Understanding that is common stock a temporary account is a misconception that can lead to incorrect bookkeeping and misleading financial statements. Properly classifying accounts between temporary and permanent ensures that period-end reporting accurately reflects cumulative capital contributions and retained earnings, and that users of financial statements can rely on consistent equity balances across periods.

If you want more examples or a downloadable worksheet to practice closing entries and equity transactions, explore Bitget’s educational materials and product pages for detailed guides on financial recordkeeping and corporate actions.