Income summary account

An Income Summary account (or Expense and Revenue Summary account) is classified as a temporary account (nominal account) which gives a summary of all expenses and revenues for a specified period.

The account is not used in the financial statements but plays an important role in the closing process. The balance of the Income Summary account is the net income or net loss (previously reported on the income statement) and is then transferred to the owner's Capital account (or Retained Earnings account). The Income Summary Account is optional, however, using this account makes the procedure of preparing closing entries more straightforward .

The Income Summary account in the closing process

The necessary steps while making closing entries are :

1. Closing the credit balances (revenue accounts) on the income statement accounts to the Income Summary account
2. Closing the debit balances (expense accounts) on the income statement accounts to the Income Summary account
3. Closing the Income Summary account balance to the owner's Capital account
4. Closing the Withdrawals account balance to the owner's Capital account

The aim of the closing entries is to clear the temporary accounts’ balances (such as expense, revenue and withdrawals accounts). Therefore, they start a new accounting period with zero balances.

Concerning the above stages of the accounting cycle, at the end, Withdrawals account's balance is transferred to the owner's Capital account (if a company is a sole proprietorship) or Retained Earnings account (if an enterprise is a corporation). After posting all closing entries to the ledger, the final step, which is a post-closing trial balance, can be made .

Description of the Income Summary account

On the debit side, total expenses are recorded. On the credit side, conversely, revenues are recorded. If the Income Summary account has a credit balance and the revenue is greater than expenses, then it means the company has earned the net income. Otherwise, if the expenses are greater than revenue and there is a debit balance, the net loss has been incurred for the period .

Related accounting issues

The uniqueness of the Income Summary account lies in the fact that it does not possess a normal balance side simply because the balance results from amounts posted on the account.

All information necessary to prepare closing entries originates from the income statement and the balance sheet .

As already indicated, the Income Summary account is opened only for the purpose of the closing process and will not appear on any financial statements.

Expense and revenue accounts can be directly closed to the owner's capital account. However, the benefit of using the Income Summary account is that a bookkeeper is able to double-check whether the balance equals the net income (net loss) and ensure that all closing entries have been posted accurately.

The Income Summary account is only used in a manual accounting system. Computerized systems, in most cases, close the temporary accounts without any records in an Income Summary account .

Examples of Income summary account

• Income Summary account is typically used at the end of an accounting period to record the net income or net loss of the period. For example, if a company has total revenues of $10,000 and total expenses of $6,000 for the period, the Income Summary account will be debited for $10,000 and credited for $6,000, resulting in a net income of $4,000.
• Income Summary can also be used to record the "closing" of revenue and expense accounts at the end of an accounting period. For example, if the company has revenue accounts for sales, service fees, and interest income, and expense accounts for salaries and wages, rent, and utilities, the balances in these accounts can be "closed" to the Income Summary account at the end of the accounting period.
• Income Summary account can also be used to record the net income or loss of a particular project or activity. For example, if a company has taken on a new project and wants to track its progress, they can create an Income Summary account to record the net income or loss of the project.

Advantages of Income summary account

An Income summary account is a temporary account that provides a summary of all revenues and expenses for a given period. It has several advantages, including:

• It allows you to easily track your revenue and expenses over a certain period of time, allowing you to make informed decisions about your budget.
• It can help to identify areas where you may be able to reduce expenses or increase revenues.
• It can provide useful insight into how well your business is performing financially.
• It can also provide a snapshot of your financial position over a certain period of time, allowing you to compare it to previous periods.
• It can help to identify trends and areas of concern, which can help to inform future decisions.

Limitations of Income summary account

• The Income summary account is only a temporary account, meaning it is only used for the current accounting period and is closed out at the end of the period.
• The Income summary account does not provide a detailed view of the various income and expenses, as it only provides a summary of the overall results.
• It is not possible to track the income and expenses over a longer period of time using the Income summary account.
• The Income summary account does not provide any information about the sources of income or the types of expenses.
• The Income summary account does not provide a way to compare income and expenses from one period to the next.

Other approaches related to Income summary account

• An income summary account is often presented in the form of a Profit and Loss Statement (P&L Statement) which shows the total income and expenses for a period of time.
• A Revenue and Expense Summary account (or P&L Statement) can also be used to compare the financial performance of different entities over a given period of time.
• Cash flow statements can also be used to compare the income and expenses of a business over a given period of time.
• The balance sheet can also be used to analyze the financial performance of a company by comparing its assets, liabilities, and equity.

In conclusion, the Income Summary account is a temporary account used to summarize the total income and expenses for a period of time. Other approaches such as P&L Statements, cash flow statements, and balance sheets can be used to analyze a company's financial performance.

Footnotes

Income summary account — recommended articles

Closing entries — Income summary — Closing balance — Post closing trial balance — T account — Book of original entry — Closing the accounts — Reversing entry — Temporary account

References

• Cunningham B.M., Nikolai L.A, Bazley J., Kavanagh M., Slaughter G., Simmons S. (2011), Accounting: Information for Business Decisions, Cengage Learning, South Melbourne, p. 201
• Gilbertson C.B., Lehman M.W. (2012), Century 21 Accounting: General Journal, Cengage Learning, Mason, pp. 206-207
• Heintz J., Parry R. (2007), College Accounting, Chapters 1-9, Cengage Learning, Mason, p.187
• Horngren C., Harrison W., Oliver S., Best P., Fraser D., Tan R. (2012), Financial Accounting, Pearson Higher Education AU, Frenchs Forest, pp. 184-185
• Needles B.E., Powers M., Crosson S.V. (2010), Principles of Accounting, Cengage Learning, Mason, pp. 146-147, 160
• Nikolai L.A., Bazley J.D., Jones J.P. (2009), Intermediate Accounting, Cengage Learning, Mason, pp. 94-95

Author: Paulina Zachara