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. It means that the value of each account in the income statement is debited 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 acquired 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 the account will be closed and transferred to the capital account for a sole proprietorship or to the ‘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 transferred.
- 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 accounts 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|
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:
|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.
|Capital Account for June 30||$4,000|
Purpose of Income Summary
It is true that revenues and expenses can be transferred directly into the balance sheet – whether it means putting the values into the retained earnings account or into the capital accounts. 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.
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