Income Summary Account

February 16, 2021

Income Summary Account

This may seem like pointless extra work, as you can transfer the data directly from the income statement to the balance sheet. Transferring revenue and expenses to the income summary creates a paper trail. That makes it much easier for auditors to later confirm that amounts in the balance sheet and elsewhere are legitimate.

  • Permanent accounts, on the other hand, track activities that extend beyond the current accounting period.
  • Companies regularly monitor their financial activities to ensure accuracy in their reporting and discover their retained earnings.
  • The business incurred a purchase expense of $50,000, rent expense of $9,000, stationary of $900, ad expense of $1,000, the expense of utilities at $800 with salaries as $40,000.
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  • The entry to close the Ryan Corporation’s income summary account was a $600 debit to income summary and a $600 credit to retained earnings.
  • We need to do the closing entries to make them match and zero out the temporary accounts.

Closing an account to retained earnings is a faster process than closing to income summaries because it skips the closing temporary accounts step. This can be a beneficial process for companies that are established and have high earnings. However, as you distribute more dividends, your company retains less.

Editorial Process

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.

On the statement of retained earnings, we reported the ending balance of retained earnings to be $15,190. We need to do the closing entries to make them match and zero out the temporary accounts.

It increases — or in the case of a net loss, decreases — retained earnings. A general ledger is the record-keeping system for a company’s financial data, with debit and credit account records validated by a trial balance. All income statement balances are eventually transferred to retained earnings. The income summary account shows performance for only one period. Therefore, making a comparative analysis with other periods would require the accountant or investor to take out the last 5 to 10 years of summaries. This is a time-consuming job and sometimes it is not possible to get data that far back for non-listed companies.

If the company has instead made a loss during the year, it will appear on the credit side of the income summary account. Revenue AccountsRevenue accounts are those that report the business’s income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it’s common examples. To create an income statement for your business, you’ll need to print out a standard trial balance report. You can easily generate the trial balance through your cloud-based accounting software. In this example of income statement, the business has a net loss for this time period. The business owner can use this information to cut back on expenses and work toward increasing product sales.

Closing Income Summary Account

Let’s explore each entry in more detail using Printing Plus’s information fromAnalyzing and Recording TransactionsandThe Adjustment Processas our example. The Printing Plus adjusted trial balance for January 31, 2019, is presented in the following Figure 1.28. It is the end of the year, December 31, 2018, and you are reviewing your financials for the entire year. You see that you earned $120,000 this year in revenue and had expenses for rent, electricity, cable, internet, gas, and food that totaled $70,000. Equipment Repair Service’s post-closing trial balance as of May 31. We have completed the first two columns and now we have the final column which represents the closing process. Once you’ve made out the income statement, drawing up the income summary is simple enough.

Closing expense accounts is the transfer of the debit balances in a company’s expense account to the income summary. This includes expenses in the accounts, such as rent, interest and salary. Accountants transfer these funds by crediting the expense account and debiting the income summary. Moving balances to an income summary helps accountants create an audit trail to follow. The first step in composing an income summary account is to remove everything from the income and revenue statements.

Income Summary Account

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. These account balances do not roll over into the next period after closing. The closing process reduces revenue, expense, and dividends account balances to zero so they are ready to receive data for the next accounting period. It involves shifting data from temporary accounts on the income statement to permanent accounts on the balance sheet. Close the owner’s drawing account to the owner’s capital account.


If we pay out dividends, it means retained earnings decreases. The remaining balance in Retained Earnings is $4,565 the following Figure 5.6. This is the same figure found on the statement of retained earnings. Calculate the company’s retained earnings balance on February 28 after closing entries are posted to the general ledger. Calculate the company’s retained earnings balance on June 30 after closing entries are posted to the general ledger. In a corporation, the amount in the income summary jumps to the balance sheet.

Income Summary Account

Starting with zero balances in the temporary accounts each year makes it easier to track revenues, expenses, and withdrawals and to compare them from one year to the next. There are four closing entries, which transfer all temporary account balances to the owner’s capital account. Income summary is a temporary account in which all the closing entries of revenue and expenses accounts are netted at the end of the accounting period. If the net balance of income summary is a credit balance, it means the company has made a profit for that year, or if the net balance is a debit balance, it means the company has made a loss for that year.

How To Post Closing Journal Entries

ShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares. If you have found yourself struggling to find the time to create your own statement from scratch, a free invoice statement template is the perfect solution. Remember to subtract returns and sales discounts from the total amount you earn from sales.

  • Revenues, expenses, dividends, and the income summary account are closed each period.
  • However, if the company also wanted to keep year-to-date information from month to month, a separate set of records could be kept as the company progresses through the remaining months in the year.
  • At the end of an accounting period, accountants post adjusting journal entries with corrections from their worksheet.
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  • Let’s explore each entry in more detail using Printing Plus’s information fromAnalyzing and Recording TransactionsandThe Adjustment Processas our example.
  • Once all the entries are passed, all the values in the expenses account would amount to zero.

If you have a healthy gross profit and a significantly lower net profit, you can make expense-cutting decisions. COGS include the cost of producing your goods or performing services (e.g., raw materials and direct labor expenses). A key aspect of proper accounting is maintaining record of expenses through Source Documents, paper or evidence of transaction occurrence.

Usefulness And Limitations Of Income Statement

The revenue accounts are debited, and the income summary accounts are credited. After passing these entries, the balance of all revenue accounts will be zero. First, all revenue accounts are transferred to income summary.

Income Summary Account

The journal reversal reinstates your year-to-date income statement balances for the next period. Permanent accounts are those that are not bound by a set time frame. They include things like retained earnings and equity accounts. Depending on the structure of your business, you may have a withdrawal or dividend accounts.

The income summary account offers the benefit of indicating the net balance between revenue and expenses (i.e. net income) during the closing process. The second entry requires expense accounts close to the Income Summary account. To get a zero balance in an expense account, the entry will show a credit to expenses and a debit to Income Summary. Printing Plus has $100 of supplies expense, $75 of depreciation expense–equipment, $5,100 of salaries expense, and $300 of utility expense, each with a debit balance on the adjusted trial balance.

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Permanent accounts are accounts that track activities extending over multiple accounting periods. Temporary accounts, also Income Summary Account known as nominal accounts, are accounts that businesses use to accumulate transactions during one accounting period.

If both summarize your income in the same period, then they must be equal. Closing entries do not affect total resources because only some stockholders’ equity accounts are involved in the closing process. The closing process keeps the results of different time periods separate from one another and puts into stockholders’ equity owners’ rights to management-generated resources retained in the company. Finally, if a dividend was paid out, the balance is transferred from the dividends account to retained earnings.

Closing The Books

Just like in step 1, we will use Income Summary as the offset account but this time we will debit income summary. The total debit to income summary should match total expenses from the income statement.

However, if we base our opinion on this, it is arguable that the new company that usually expects the loss at the beginning years would assume that the income summary normal balance is on the debit side instead. The business has earned interest income of $8,000, revenues of $90,000, and miscellaneous income of $7,400. The business incurred a purchase expense of $50,000, rent expense of $9,000, stationary of $900, ad expense of $1,000, the expense of utilities at $800 with salaries as $40,000. Help the management prepare the income summary for the financial year ending. Therefore, it does not give the correct financial picture of the organization. All Expense AccountsExpense accounting is the accounting of business costs incurred to generate revenue. Accounting is done against the vouchers created at the time the expenses are incurred.

Being able to record a company’s closing entry helps these financial professionals clear a temporary account and prepare for the new accounting cycle. Other benefits of this process include transferring a business’s net income into retained earnings. This is helpful because it lets a company know how much money they have left after paying out dividends to shareholders.

The values are debited from their respective accounts and credited to the income summary. Subtract the selling and administrative expenses total from the gross margin. Subtract the cost of goods sold total from the revenue total on your income statement. This calculation will give you the gross margin, or the gross amount earned from the sale of your goods and services.

If this is the case, the corporation’s accounting department makes a compound entry to close each dividend account to the retained earnings account. Close income summary to the owner’s capital account or, in corporations, to the retained earnings account. The purpose of the income summary account is simply to keep the permanent owner’s capital or retained earnings account uncluttered.

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