This transfers the income or loss from an income statement account to a balance sheet account. An income summary is a temporary account in which all the revenue and expenses accounts’ closing entries are netted at the accounting period’s end. Once the entries are finalized, the income summary closing entries are documented and transferred to the retained earnings of an organization or individual. The income summary account is a temporary account used to store income statement account balances, revenue and expense accounts, during the closing entry step of the accounting cycle.

• The income summary account is prepared by debiting revenue accounts and crediting expense accounts.
• The purpose of the income summary account is to facilitate the process of closing temporary accounts and transfer their balances into the retained earnings account.
• The income summary account is also known as the temporary income statement account.
• However, there is the possibility of another practice, which is called known as postings reversing entries.

Accounts

• The following points are important to highlight related to the above income summary account for Bob and his company, Bob’s Donut Shoppe, Inc.
• 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.
• This is the first step to take in using the income summary account.
• This way each accounting period starts with a zero balance in all the temporary accounts.

Let us understand how to calculate the income of a company or an individual through the discussion below. You can either close these accounts directly to the retained earnings account or close them to the income summary account. If the income summary account has a net credit balance i.e. when the sum of the credit side is greater than the sum of the debit side, the company has a net income for the period. Conversely, if the income summary account has a net debit balance i.e. when the sum of the debit side is greater than the sum of the credit side, it represents a net loss. The income summary account is also known as the temporary income statement account. Temporary accounts are those that are closed at the end of an accounting cycle.

Transform your Record-to-Report processes with HighRadius!

To obtain information about the net amount of money received for the reporting year, all accounts that reflect business expenses are recorded as the debit to the Income summary, and revenue totals are recorded as the credit. Let us understand the advantages of passing income summary closing entries for an organization or an individual through the points below. Closing the income summary account is done after all income sources are accounted as retained earnings of the organization. But before that entry is passed, there are a few steps to the process. Our solution has the ability to prepare and post journal entries, which will be automatically posted into the ERP, automating 70% of your account reconciliation process. In order to get all your revenues and expenses into our Retained earnings, you need to use an account in called Income summary.

Post navigation

This is the second step to take in using the income summary account, after which the account should have a zero balance. For the rest of the year, the income summary account maintains a zero balance. Once the temporary accounts are closed to the income summary account, the balances are held there until final closing entries are made. Once all the temporary accounts are closed, the balance in the income summary account should be equal to the net income of the company for the year. As you can see, the income and expense accounts are transferred to the income summary account.

Closing process

All your revenue and expense accounts are going to be closed into your Retained earnings. Likewise, shifting expenses out of the income statement requires you to credit all of the expense accounts for the total amount of expenses recorded in the period, and debit the income summary account. This is the first step to take in using the income summary account. If the net balance of the income summary is a credit balance, it means the company has made a profit for that year, define the income summary account. or if the net balance is a debit balance, it means the company has made a loss for that year. It summarizes income and expenses arising from operating and non-operating activities.

It was declared at $1.2 billion or %3.03 for each diluted common share. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

This process updates retained earnings and resets the income summary account to zero. Once everything is in the account, businesses can easily determine if they made a profit or a loss. After this analysis, they move the total profit or loss into their main savings account, also called retained earnings, and the income summary account is emptied and ready to be used again next year. This serves as an excellent way for businesses to keep their financial records organized and start fresh each year. An income summary account is a temporary account used by businesses at the end of the year to organize their finances.

Step 3: Determine net profit or net loss

The income summary account is an account that receives all the temporary accounts of a business upon closing them at the end of every accounting period. This means that the value of each account in the income statement is debited from the temporary accounts and then credited as one value to the income summary 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. Now, you will categorize your bookkeeping accounts in a new way – whether they are permanent and closed at the end of the period or temporary and not affected by the closing entries. You would leave all Balance sheet accounts as they are; they do not change.

Step 1 – Closing of Revenue Accounts

After closing, its balance is reflected in the retained earnings on the balance sheet. Yes, the income summary is a temporary account used to summarize revenues and expenses for a specific period before transferring the net income or net loss to the retained earnings account. It is reset to zero at the end of each accounting period and does not carry a balance forward. It is used when a company chooses to transfer the balance of individual revenue and expense accounts directly to retained earnings or when a company chooses to close the books using an income statement.

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.