Income Summary Meaning in Accounting Helpful Overview
Before the Income Summary account is closed, its balance represents the net income or net loss for the accounting period. The owner’s capital account is closed at the end of each accounting period. The entry to close an expense account requires a credit to the Income Summary account. After Paul’s Guitar Shop prepares its closing entries, the income summary account has a balance equal to its net income for the year.
Income summary account
- XYZ Inc is preparing an income summary for the year ended December 31, 2018, and below are the revenue and expense account balances as of December 31, 2018.
- Merchandise inventory (also known as Inventory) is a current asset that has a normal debit balance, meaning that a debit will increase while a credit will decrease.
- Income and expenses are closed to a temporary clearing account, usually Income Summary.
- We know the change in the balance includes net income and dividends.
- After closing all the company’s or firm’s revenue and expense accounts, the income summary account’s balance will equal the company’s net income or loss for the particular period.
This way each accounting period starts with a zero balance in all the temporary accounts. The income summary is a temporary account that is used to close entries. The net balance of all temporary accounts is then transferred to retained earnings, a permanent account on the balance sheet, by the income summary account. The credit balance of the revenue account is transferred by debiting what is income summary normal balance the revenue account and crediting the income summary account. Similarly, the debit balances on the expense’s accounts are transferred and zeroed out by debiting the income summary and crediting the individual expenses account. The income summary account process ensures the generation of accurate financial statements and ensures that the revenues and expenses for the accounting period are accurately closed for that period.
Order to Cash
The Income Summary will be closed with a debit for that amount and a credit to Retained Earnings or the owner’s capital account. If the Income Summary has a debit balance, the amount is the company’s net loss. The Income Summary will be closed with a credit for that amount and a debit to Retained Earnings or the owner’s capital account. Next, if the Income Summary has a credit balance, the amount is the company’s net income. Now that Paul’s books are completely closed for the year, he can prepare the post closing https://www.bookstime.com/ trial balance and reopen his books with reversing entries in the next steps of the accounting cycle. If you are using accounting software, the transfer of account balances to the income summary account is handled automatically whenever you elect to close the accounting period.
Step 1 – Closing of Revenue Accounts
However, it can provide a useful audit trail, showing how these aggregate amounts were passed through to retained earnings. If the credit balance is more than the debit balance, it indicates the profit; if the debit balance is more than the credit balance, it shows the loss. In the last credit or debit balance, whatever may become, it will be transferred into retained earnings or capital account in the balance sheet, and the income summary will be closed. At the end of a period, all the income and expense accounts transfer their balances to the income summary account. The income summary account holds these balances until final closing entries are made. Then the income summary account is zeroed out and transfers its balance to the retained earnings (for corporations) or capital accounts (for partnerships).
The income summary account in a credit position means the company has made a profit and the income summary account in a debit position means the company has made a loss. Accountants use an account called the income summary to close the year for temporary accounts. The purpose of this petty cash article is to define the income summary account and look at a helpful overview so that this account becomes less of a mystery. A net loss would decrease retained earnings so we would do the opposite in this journal entry by debiting Retained Earnings and crediting Income Summary.
