Income summary account

Income summary account
See also

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 [1].

The Income Summary account in the closing process

The necessary steps while making closing entries are [2]:

  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 [3].

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 [4].

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 [5].

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 [6].

Footnotes

  1. Needles B.E., Powers M., Crosson S.V. 2010, pp. 146-147, 160
  2. Needles B.E., Powers M., Crosson S.V. 2010, pp. 146-147, 160
  3. Needles B.E., Powers M., Crosson S.V. 2010, pp. 146-147, 160
  4. Gilbertson C.B., Lehman M.W. 2012, pp. 206-207
  5. Gilbertson C.B., Lehman M.W. 2012, pp. 206-207
  6. Heintz J., Parry R. 2007, p.187

References

Author: Paulina Zachara