Closing Entries Using Income Summary

Remember that the periodicity principle states that financial statements should cover a defined period of time, generally one year. If we do not close out the balances in the revenue and expense accounts, these accounts would continue to contain the revenue and expense balances from previous years and would violate the periodicity principle. The Income summary is not only not permanent, but it can also not exist in a particular business at all. Some businesses choose to forgo creating and then closing this Income summary account. This typically happens when a company uses accounting software to maintain its financial income summary account records.

For closing transactions, the bookkeepers use an account called the Income summary account. You will see what role it plays in the whole process in just a moment. Afterward, these accounts are again ready to perform the function of temporary data accumulation for the next year. This account, essentially, is going to be the same in total value as the company’s Net income. This net balance of income summary represents the net income if it is on the credit side.

Thus, this account plays a supporting “transitional” role in summarizing information about the revenue and expenses of the enterprise at the end of the period. To review if the closing entries are reflected correctly, a Post-Closing Trial Balance can be compiled. This process represents the final stage of the enterprise accounting cycle. However, there is the possibility of another practice, which is called known as postings reversing entries.

Income Summary Account: Role in Accounting

To close expenses, we simply credit the expense accounts and debit Income Summary. Let us understand how income summary closing entries are passed. Before passing those entries, there are a few processes and steps to be followed to reach that stage. Let us understand how to calculate the income of a company or an individual through the discussion below.

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The income summary account does not have a normal balance because it is a temporary account used to summarize revenues and expenses. It can have either a credit balance (indicating net income) or a debit balance (indicating net loss), depending on the period’s financial results. The post-closing trial balance report lists down all the individual accounts after accounting for the closing entries. At this point in the accounting cycle, all the temporary accounts have been closed and zeroed out to permanent accounts.

Instead of sending a single account balance, it summarizes all the ledger balances in one value. It transfers it to a balance sheet, which gives more meaningful output for investors, and management, vendors, and other stakeholder. An income summary account summarizes all the operating and non-operating business activities on one page and concludes the company’s financial performance. After these entries, the balance in the income summary account should represent the net income or loss for the period. In this case, it’s a credit balance of $15,000 ($100,000 – $85,000), which represents the net income.

For the rest of the year, the income summary account maintains a zero balance. The net amount transferred into the income summary account equals the net profit or net loss that the business incurred during the period. Thus, shifting revenue out of the income statement means debiting the revenue account for the total amount of revenue recorded in the period, and crediting the income summary account. When doing closing entries, try to remember why you are doing them and connect them to the financial statements. To update the balance in Retained Earnings, we must transfer net income and dividends/distributions to the account.

However, it remains a key concept in understanding how the accounting cycle works, especially in manual or educational contexts. In a corporation, the amount in the income summary jumps to the balance sheet. It increases — or in the case of a net loss, decreases — retained earnings. Income and expenses are closed to a temporary clearing account, usually Income Summary. Afterwards, withdrawal or dividend accounts are also closed to the capital account.

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To close that, we debit Service Revenue for the full amount and credit Income Summary for the same. If the credit side is greater than the debit side, the company or the individual is said to have been profitable in the assessment period. In contrast, when there is a loss incurred, the debit side has more value than the credit side of the account. Closing of bookkeeping accounts that are set up as temporary happens when the reporting year comes to an end since the balances identified on them relate to the previous reporting period.

How to close a revenue account?

The word temporary does not mean that the bookkeeper crosses out the accounts altogether after some time. Actually, just the balances of each account are getting removed, which is typically the end of the calendar year for most companies. In other words, they will begin the new year with a blank slate. You will see these accounts on every business’s reports, which is obviously the accounts that reflect revenue sources, all the various expenses, and money paid to the shareholders. It may be assumed that the income summary normal balance is on the credit side as this refers that the company expects the net income at the end of the period, in which it usually does expect that. 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.

Close revenue accounts

The income summary account is an intermediate account that is used 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. The income summary account is also used when a company chooses to close the books using an income statement. This way each accounting period starts with a zero balance in all the temporary accounts.

• In a corporation, the amount in the income summary jumps to the balance sheet.
• Closing temporary accounts to the income summary account requires an extra step.
• The income summary entries are the total expenses and total income from your company’s income statement.
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• The Income summary is a little helper bookkeepers turn to ensure that they move gains or losses and other temporary items to the Balance sheet without any errors.

All revenue accounts will be closed at the conclusion of the accounting period. We do this by transferring the credit amount to the income summary. The revenue accounts will be debited, and the income summary account will be credited. All revenue accounts will become zero after this entry is completed. 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.

At the end of the accounting period, all the revenue accounts will be closed by transferring the credit balance to the income summary. It will be done by debiting the revenue accounts and crediting the income summary account. After passing this entry, all revenue accounts will become zero. 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.

• This is the first step to take in using the income summary account.
• The income summary account does not have a normal balance because it is a temporary account used to summarize revenues and expenses.
• That makes it much easier for auditors to later confirm that amounts in the balance sheet and elsewhere are legitimate.
• It transfers it to a balance sheet, which gives more meaningful output for investors, and management, vendors, and other stakeholder.

At the end of the year, businesses gather all revenue and expenses and place them into an income summary account. Closing temporary accounts to the income summary account requires an extra step. However, it also gives an audit record of the year’s revenues, expenses, and net income.

In this case, the program or bookkeeper will take the balances of all the temporary general ledger accounts and add them directly to the appropriate Balance sheet accounts. You will make a credit entry when transferring revenue to the Retained earnings, for instance, and debit it when transferring all the expenses. Additionally, it is important to note that the income summary account plays both roles of the debit and the credit at the same time when the company closes the income statement at the end of the period. For example, the expenses are transferred to the debit side of the income summary while the revenues are transferred to the credit side of the income summary.