If the income summary has a credit balance, it indicates that the company has made profit. Profit or loss in income summary account is transferred to the retained earnings account. To further clarify this concept, balances are closed to assure all revenues and expenses are recorded in the proper period and then start over the following period. The revenue and expense accounts should start at zero each period, because we are measuring how much revenue is earned and expenses incurred during the period.

• Income summary is not reported on any financial statements because it is only used during the closing process, and at the end of the closing process the account balance is zero.
• 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.
• For our purposes, assume that we are closing the books at the end of each month unless otherwise noted.
• The statement of retained earnings shows the period-ending retained earnings after the closing entries have been posted.
• Because expenses are decreased by credits, you must credit the account and debit the income summary account.

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. The Closing Process is a step in the accounting cycle that occurs at the end of the accounting period, after the financial statements are completed. Finally, you are ready to close the income summary account and transfer the funds to the retained earnings account. In a partnership, separate entries are made to close each partner’s drawing account to his or her own capital account. If a corporation has more than one class of stock and uses dividend accounts to record dividend payments to investors, it usually uses a separate dividend account for each class.

Temporary accounts and Permanent accounts:

To get a zero balance in a revenue account, the entry will show a debit to revenues and a credit to Income Summary. Printing Plus has $140 of interest revenue and $10,100 of service revenue, each with a credit balance on the adjusted trial balance. The closing entry will debit both interest revenue and service revenue, and credit Income Summary. You might be asking yourself, “is the Income Summary account even necessary? ” Could we just close out revenues and expenses directly into retained earnings and not have this extra temporary account?

If dividends are declared, to get a zero balance in the Dividends account, the entry will show a credit to Dividends and a debit to Retained Earnings. As you will learn in Corporation Accounting, there are three components to the declaration and payment of dividends. The first part is the date of declaration, which creates the obligation or liability to pay the dividend. The second part is the date of record that determines who receives the dividends, and the third part is the date of payment, which is the date that payments are made.

What Is An Income Summary:

Way holds a Master of Business Administration in finance from Central Michigan University and a Master of Accountancy from Golden Gate University in San Francisco. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.

Closing, or clearing the balances, means returning the account to a zero balance. Having a zero balance in these accounts is important so a company can compare performance across periods, particularly with income. It also helps the company keep thorough records of account balances affecting retained earnings. Revenue, expense, and dividend accounts affect retained earnings and are closed so they can accumulate new balances in the next period, which is an application of the time period assumption. After Paul’s Guitar Shop prepares its closing entries, the income summary account has a balance equal to its net income for the year.

What is Income Summary?

This is the first step to take in using the income summary account. You need to use closing entries to reduce the value of your temporary accounts to zero. That way, your next accounting period does not have a balance in your revenue or expense account from the previous period. If the resulting balance in the income summary account is a debit balance, then the same amounts to a net loss, which is also transferred into the retained earnings account.

• ” Could we just close out revenues and expenses directly into retained earnings and not have this extra temporary account?
• The balance in Retained Earnings agrees to the Statement of Retained Earnings and all of the temporary accounts have zero balances.
• Income summary is a holding account used to aggregate all income accounts except for dividend expenses.
• You might be asking yourself, “is the Income Summary account even necessary?
• The income summary is a summarization and compilation of temporary accounts of the revenues and expenses.

Net income or loss measured in income summary account is transferred to retained earnings account, which is reported in the balance sheet. Notice that the balances in the expense accounts are now zero and are ready to accumulate expenses in the next period. The Income Summary account has a new credit balance of $4,665, which is the difference between revenues and expenses bookkeeping for startups in Figure 1.29. The balance in Income Summary is the same figure as what is reported on Printing Plus’s Income Statement. The income summary account is an intermediary between revenues and expenses, and the Retained Earnings account. It stores all of the closing information for revenues and expenses, resulting in a “summary” of income or loss for the period.