The income summary account is only used in closing process accounting. Basically, the income summary account is the amount of your revenues minus expenses. You will close the income summary account after you transfer the amount into the retained earnings account, which is a permanent account.
- Looking at the revenue account balance, all the revenue-generating sources, whether operating or non-operating business functions are included in the process.
- If you paid out dividends during the accounting period, you must close your dividend account.
- The account is then cleared out and transferred to retained earnings, which we will explain.
- The trial balance shows the ending balancesof all asset, liability and equity accounts remaining.
Step 1: Close Revenue accounts
The closing entries are the journal entry formof the Statement of Retained Earnings. The goal is to make theposted balance of the retained earnings account match what wereported on the statement of retained earnings and start the nextperiod with a zero balance for all temporary accounts. Closing entries are journal entries used to empty temporary accounts at the end of a reporting period https://www.bookkeeping-reviews.com/ and transfer their balances into permanent accounts. Temporary accounts are used to accumulate income statement activity during a reporting period. The use of closing entries resets the temporary accounts to begin accumulating new transactions in the next period. Otherwise, the balances in these accounts would be incorrectly included in the totals for the following reporting period.
Income summary debit or credit
This is the second stage in using the income summary account; the account should now have a zero balance. Modern-day accounting software typically does the process of automatically debiting or crediting revenue and expense balances once the accounting period ends. Once a company determines whether it has sustained a xero accounting community loss or earned a profit, the results from the final account are typically transferred into retained earnings on the balance sheet. Credit retained earnings for the balance contained in the income summary account. A company with a $5,000 balance in the income summary account must credit retained earnings for $5,000.
8: Closing Entries
A company will see its revenue and expense accounts set back to zero, but its assets and liabilities will maintain a balance. Stockholders’ equity accounts will also maintain their balances. In summary, the accountant resets the temporary accounts to zero by transferring the balances to permanent accounts. Income summaries are temporary accounts that net all the revenue and expenses accounts to determine whether there was a credit balance (profit) or debit balance (loss). They make it easier for businesses to transition revenues and expenses into the balance sheet.