Temporary accounts are those that are closed at the end of an accounting cycle. To close the income summary account, the balance in the account needs to be transferred to a capital account (generally the retained earnings). Closing entries play a significant role in producing the accounts as they move the temporary account balances to permanent accounts on the balance sheet. By doing so, the income summary account displays the net results of the company for a financial period.

The business is said to make profits if the credit portion of the income summary statement is more than the debit side of the income summary statement. Similarly, the business is said to make losses if the debit portion of the income summary statement is more than the credit side of the income summary statement. All temporary accounts of revenue and expenses have to be first transferred into the temporary statement of define the income summary account income and summary account. The balances in each of the temporary accounts would then be closed out in either capital account as applied for sole proprietorship business and retained earnings as applied for the corporation. The professionals should not be confused with the income statement, and income summary account as both of the concepts rely on the reports of income and losses earned and incurred by the business.

What is another name for income summary account?

You can either close these accounts straight to the retained profits account or close them to the income summary account. Transferring the expense account to the account is similar to the revenue account process. However, rather than credit the expense balance to transfer it, businesses must debit it, given that expenses are already credited. Once all the temporary accounts are compiled, the value of each account is then debited from the temporary accounts and credited as a single value to the income summary.

This and other summary accounts can be thought of as a clearing account. In the final netted value column, whether a debit or credit, the amounts would then be transferred to the capital account of the business, and the parallelly, the income summary would be closed out or terminated. This final income summary balance is then transferred to the retained earnings (for corporations) or capital accounts (for partnerships) at the end of the period after the income statement is prepared.

Profit and income Statement

The income summary account is neither an asset nor a liability; it is a temporary equity account used in the closing process of accounting. The income summary account is employed to transfer the balances of revenue and expense accounts at the end of an accounting period. A net income is closed/transferred to retained earnings by debiting income summary account and crediting retained earnings account while a net loss is transferred by crediting income summary account and debiting retained earnings account. Once this process is complete, a post-closing trial balance is prepared which helps in preparation of the balance sheet. Income summary account is a temporary account used in the closing stage of the accounting cycle to compile all income and expense balances and determine net income or net loss for the period.

Expense accounts are always losses or costs, meaning they have debit balances. The general rule is that balance sheet accounts are permanent accounts and income statement accounts are temporary accounts. In practice, temporary accounts require a little more attention than permanent accounts. If the Income Summary account has a credit balance and the revenue is greater than expenses, then it means the company has earned the net income.

What is the Purpose of the Income Summary Account?

Next, if the Income Summary has a credit balance, the amount is the company’s net income. The Income Summary will be closed with a debit for that amount and a credit to Retained Earnings or the owner’s capital account. The income summary account is at a credit position of $27,000 so that means to close the account, we need to debit the income summary account of that amount with the balancing side going to retained earnings.

The income summary account is defined as the account of temporary or provisional in nature wherein the statement at the end of the accounting period net off all the closing entries of expenses and revenue accounts. The Income Summary is a fundamental financial statement that plays a crucial role in summarizing a company’s financial performance over a specific period, typically at the end of an accounting period, such as a fiscal quarter or year. This concise yet powerful statement serves as a bridge between a company’s revenue and expense accounts and its retained earnings.

What is Income Summary? Introduction Closing Process Examples Read in 2023

If the credit balance exceeds the debit balance, it indicates a profit. On the other hand, if the debit balance is greater than the credit balance, it indicates a loss. Essentially, the income summary account summarizes the activities of a company for a financial year. An Income Summary account (or Expense and Revenue Summary account) is classified as a temporary account (nominal account) which gives a summary of all expenses and revenues for a specified period.