Income Summary Account and Closing Process

If a profit was realized, the income summary would be debited and the retained earnings would be credited. All temporary accounts must be reset to zero at the end of the accounting period. The income summary account then transfers the net balance of all the temporary accounts to retained earnings, which is a permanent account on the balance sheet. There are generally two components of the income summary statement, namely the debit side and credit side. Income summary account is a temporary account used in the closing stage of the accounting cycle to compile all income and expense balances and determine net income or net loss for the period. The net balance of the income summary account is closed to the retained earnings account.

• The income summary account is defined as the account of temporary or provisional in nature wherein the statement at the end of the accounting period net off all the closing entries of expenses and revenue accounts.
• This final income summary balance is then transferred to the retained earnings or capital accounts at the end of the period after the income statement is prepared.
• Both revenue and expenses are closely monitored since they are important in keeping costs under control while increasing revenue.
• Note, for this example, an automatic off-set entry will be posted to cash and IU users are not able to post directly to any of the cash object codes.
• Accounts such as Sales Income, Accounts Receivable and Interest Payable are permanent, the Corporate Finance Institute explains.

The formula for calculating the total retained earnings is revenue minus expenses. In this case, the total retained earnings are listed as credit because the revenue (credited) was more significant than the expenses. Looking at the revenue account balance, all the revenue-generating sources, whether operating or non-operating business functions are included in the process.

Overview: What are closing entries?

The top section contains current assets, which are short-term assets typically used up in one year or less. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. WSO provides its members with an Accounting Foundations course to master the necessary accounting skills.

The professionals should not be confused with the income statement, and income summary account as both of the concepts rely on the reports of income and losses earned and incurred by the business. Temporary account balances can either be shifted directly to the retained earnings account or to an intermediate account known as the income summary account beforehand. Temporary accounts are used to record accounting activity during a specific period. For example, $100 in revenue this year does not count as $100 of revenue for next year, even if the company retained the funds for use in the next 12 months.

• Printing Plus has a $4,665 credit balance in its Income Summary account before closing, so it will debit Income Summary and credit Retained Earnings.
• While these accounts remain on the books, their balance is reset to zero each month, which is done using closing entries.
• LO 5.2Identify which of the following accounts
  would not be listed on the company’s
  Post-Closing Trial Balance.
• On the other hand, if it is on the debit, it presents the net loss of the company.

Calculate the company’s fees revenue balance on February 28 after closing entries are posted to the general ledger. 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. 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.

Income Summary Account

Once all the entries are passed, all the values in the revenue account would amount to zero. The income summary account is defined as the account of temporary or provisional in nature wherein the statement at the end of the accounting period net off all the closing entries of expenses and revenue accounts. The expense accounts have debit balances so to get rid of their balances we will do the opposite or credit the accounts. 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. When the accounting period ends, all the revenue accounts are closed when the credit balance is properly transferred.

The accounts on right side of this equation have a normal balance of credit. The normal balance of all other accounts are derived from their relationship with these three accounts. An account has either credit (Abbrev. CR) or debit (Abbrev. DR) normal balance.

Step 4: Closing the drawing/dividends account

The Income Summary will be closed with a debit for that amount and a credit to Retained Earnings or the owner’s capital account. As noted earlier, expenses are almost always debited, so we debit Wages Expense, increasing its account balance. Since your company did not yet pay its employees, the Cash account is not credited, instead, the credit is recorded in the liability account Wages Payable.

How to Prepare Your Closing Entries

Others will argue, however, that based on the definition of normal balance – the balance expected of a particular account – Income Summary can be said to have no normal balance. Alternately, they can be listed in one column, indicating debits with the suffix “Dr” or writing them plain, and indicating credits with the suffix “Cr” or a minus sign. LO 5.1The account called Income Summary is often
used in the closing entries.

Income Summary

As a result, the business credited its revenue account more than it debited its expenses account, leading to a credit balance. All companies have revenue and expense accounts, which need to be transferred into the company’s summary. An income summary is an account that is temporary and nets all the temporary accounts for a business upon closing them at the end of the given accounting period. The Income Summary will be closed with a credit for that amount and a debit to Retained Earnings or the owner’s capital account. Because the balances in the temporary accounts are transferred out of their respective accounts at the end of the accounting year, each temporary account will have a zero balance when the next accounting year begins.

This reflects your net income for the month, and increases your capital account by $250. Whether you’re posting entries manually or using accounting software, all revenue and expenses for each accounting top 5 legal accounting software for modern law firms period are stored in temporary accounts such as revenue and expenses. After closing the revenue accounts, the next step in compiling the document is to close all the expense accounts.

This involves debiting the revenue accounts to reset them with zero balance and crediting the final temporary account. This is the second step to take in using the income summary account, after which the account should have a zero balance. Likewise, a Loan account and other liability accounts normally maintain a negative balance. Accounts that normally maintain a negative balance usually receive just credits. Let’s explore each entry in more detail using Printing Plus’s information from Analyzing and Recording Transactions and The Adjustment Process income summary normal balance as our example. The Printing Plus adjusted trial balance for January 31, 2019, is presented in Figure 5.4.