Over 2 million + professionals use CFI to learn accounting, financial analysis, modeling and more. Unlock the essentials of corporate finance with our free resources and get an exclusive sneak peek at the first module of each course.
Start Free
What is Income Summary?
The income summary account is an account that receives all the temporary accounts of a business upon closing them at the end of every accounting period. This means that the value of each account in the income statement is debited from the temporary accounts and then credited as one value to the income summary account.
There are two sides to the income summary account: the credit and debit sides. A company is said to have made profits if the credit side is higher than the debit side, while losses have been incurred if the debit side is higher than the credit side.
After all temporary accounts have been transferred to the income summary account, the balance in each temporary account will be closed and transferred to the capital account for a sole proprietorship or to “retained earnings” for a corporation.
Income Summary vs. Income Statement
Many people become confused between income summary and income statement since both concepts provide a report of the nets and losses of a company. However, the two are different, and the following points are some of their differences:
Temporary vs. permanent account – The most basic difference between the two accounts is that the income statement is a permanent account, reflecting the income and expenses of a company. The income summary, on the other hand, is a temporary account, which is where other temporary accounts like revenues and expenses are compiled.
The details in the income statement are transferred to the income summary account where the expenses are deducted from the revenues to determine if the business made a profit or a loss.
Debit and credit – When the accounts in the income statement are transferred, the values are debited from the accounts and then credited to the income summary account.
The income statement is used for recording expenses and revenues in one sheet. Income summary, on the other hand, is for closing records of expenses and revenues for a given accounting period.
How to Close an Account into Income Summary Account
When closing the accounts in the income statement, accountants can choose to close them directly and transfer the values to the retained earnings account or transition them to the income summary account before finally transferring them to the retained earnings account. Let us discuss how to do the latter.
The content of the income statement (such as the revenues and expenses) are transferred to the income summary. The values are debited from their respective accounts and credited to the income summary.
The amounts in the account should be checked for errors. Accountants should take note that its balance should equal the net income of the company for the year.
Afterward, the balance in the income summary account is transferred to the retained earnings account if the business is a corporation or to the capital account of the owner for a sole proprietorship. Only then is the account closed.
Example of an Income Summary Account
Let’s say Company ZED is closing the accounting period and will need to transfer the values in its income statement onto the income summary account. Consider the following table:
Period ending June 30
Total Revenue
$5,000
Expenses
$1,000
– Utilities
– Rent
– Insurance
$300
$500
$200
The table above contains the values of the revenue and expenses and will be transferred to the income summary account. Each value will be debited and then credited to the account as one value, as shown below:
Total Expenses
$1,000
Income Summary (Revenue – Expenses)
$4,000
After the accounts are closed, the income summary is then transferred to the capital account of the owner and then closed.
Income Summary
$4,000
Capital Account for June 30
$4,000
Purpose of Income Summary
It is true that revenues and expenses can be transferred directly onto the balance sheet – whether it means putting the values into the retained earnings account or into the capital account. However, transitioning it first into the income summary helps provide an audit trail that will show the company’s net, expenses, and revenue for the year.
Additional Resources
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
Learn accounting fundamentals and how to read financial statements with CFI’s online accounting classes.
These courses will give you the confidence to perform world-class financial analyst work. Start now!
Boost your confidence and master accounting skills effortlessly with CFI’s expert-led courses! Choose CFI for unparalleled industry expertise and hands-on learning that prepares you for real-world success.
Take your learning and productivity to the next level with our Premium Templates.
Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.
Gain unlimited access to more than 250 productivity Templates, CFI's full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.