A debit would be done to the revenue account, and the credit would be done to the income summary account. Once all the entries are passed, all the values in the revenue account would amount to zero. This way each accounting period starts with a zero balance in all the temporary accounts. It is a temporary, intermediate account, which means that the revenue and expenses balance is transferred to permanent accounts at the end of the accounting period through closing entries. 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.
Net Operating Income is profit from sales without considering corporate overhead. To make it easy to understand, our sample Income Statement has limited entries. Smaller companies and sole proprietors will not have a complex Income Statement, especially when run for a short period of time such as a month. The Income Statement provides data on a company’s Income and Expense accounts. The other three account types, Assets, Equity, and Liabilities, are featured on the Balance Sheet.
#3. Complete the Income Summary Account
The income summary account balance is then transferred to retained earnings or the capital account in the case of a sole proprietorship. The income summary account is prepared by debiting revenue accounts and crediting expense accounts. At the end of a period, all the income and expense accounts transfer their balances to the income summary account. The income summary account holds these balances until final closing entries are made. Then the income summary account is zeroed out and transfers its balance to the retained earnings (for corporations) or capital accounts (for partnerships).
The income summary account is an intermediate point at which revenue and expense totals are accumulated before the resulting profit or loss passes through to the retained earnings account. However, it can provide a useful audit trail, showing how these aggregate amounts were passed through to retained earnings. We will use the 3-steps process to close the revenue and define the income summary account expense accounts before closing the income summary account. 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.
Step 1: Close the Revenue Accounts
The income summary account is then canceled out and its balance is transferred to the retained earnings (for corporations) or capital accounts (for partnerships). The income summary account has a zero balance for the rest of the year. We also do this by transferring the debit to the income summary by crediting the costs account and debiting the income summary account.
- In a journal entry like this, the balance is transferred to the retained earnings account.
- Afterward, its balance is transferred to the retained earnings (for corporations) or capital accounts (for partnerships).
- The Income Summary is a temporary accounting account used to simplify the process of closing a company’s books at the end of a specific accounting period, such as a fiscal quarter or year.
- The revenue accounts would be closed by giving the credit summary on to the income summary.
- If the resulting balance in the account is a profit (a credit balance), debit the income summary account and credit the retained earnings account to shift the profit into retained earnings.
Now that Paul’s books are completely closed for the year, he can prepare the post closing trial balance and reopen his books with reversing entries in the next steps of the accounting cycle. You record the income summary amount by adding the total expenses and total income and then transferring them to the balance sheet. Sam’s books are now totally closed for the year, and he may create the post-closing trial balance and reopen his books with reverse entries in the following steps of the accounting cycle.