Is the income summary account is an account used only during the closing process?
Definition of Income Summary AccountThe Income Summary account is a temporary account used with closing entries in a manual accounting system. (Computerized accounting systems may close the temporary accounts without recording the amounts in an Income Summary account.) Show
The Income Summary is very temporary since it has a zero balance throughout the year until the year-end closing entries are made. Next, the balance resulting from the closing entries will be moved to Retained Earnings (if a corporation) or the owner's capital account (if a sole proprietorship). Example of Income Summary AccountIn a manual accounting system, the closing entries will result in the following amounts in Income Summary:
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. 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. An account that receives all the temporary accounts upon closing them at the end of every accounting period What is Income Summary?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. There are two sides to the income summary account: the credit and debit sides. A company is said to have made profits if the credit side is higher than the debit side, while losses have been incurred if the debit side is higher than the credit side. After all temporary accounts have been transferred to the income summary account, the balance in each temporary account will be closed and transferred to the capital account for a sole proprietorship or to “retained earnings” for a corporation. Income Summary vs. Income StatementMany people become confused between income summary and income statement since both concepts provide a report of the nets and losses of a company. However, the two are different, and the following points are some of their differences:
How to Close an Account into Income Summary AccountWhen closing the accounts in the income statement, accountants can choose to close them directly and transfer the values to the retained earnings account or transition them to the income summary account before finally transferring them to the retained earnings account. Let us discuss how to do the latter.
Example of an Income Summary AccountLet’s say Company ZED is closing the accounting period and will need to transfer the values in its income statement onto the income summary account. Consider the following table:
The table above contains the values of the revenue and expenses and will be transferred to the income summary account. Each value will be debited and then credited to the account as one value, as shown below:
After the accounts are closed, the income summary is then transferred to the capital account of the owner and then closed.
Purpose of Income SummaryIt is true that revenues and expenses can be transferred directly onto the balance sheet – whether it means putting the values into the retained earnings account or into the capital account. However, transitioning it first into the income summary helps provide an audit trail that will show the company’s net, expenses, and revenue for the year. Additional ResourcesCFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
Is income Summary A closing account?The income summary account is only used in closing process accounting. Basically, the income summary account is the amount of your revenues minus expenses. You will close the income summary account after you transfer the amount into the retained earnings account, which is a permanent account.
What is the income summary account used for?The purpose of an income summary account is to close the books. 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.
Why is the income summary account used in the closing process?The Income Summary account is only used during the year-end closing process -- it facilitates the transfer of balances away from the temporary accounts and into the permanent accounts.
What account is income summary closed into?In corporations, income summary is closed to the retained earnings account.
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