The income summary account is a temporary account into which all income statement revenue and expense accounts are placed at the end of an accounting period. The net amount put into this account equals the business’s net profit or loss for the period. Shifting revenue out of the income statement, therefore, entails debiting the revenue account for the total amount of revenue recorded in the period and crediting the income summary account.

Additionally, all the information is condensed into one location, making it a fantastic tax tool. On the other hand, if the debit balance is greater than https://www.bookstime.com/ the credit balance, it indicates a loss. The business has earned interest income of $8,000, revenues of $90,000, and miscellaneous income of $7,400.

Introduction to Income Summary

The income summary account is neither an asset nor a liability; it is a temporary equity account used in the closing process of accounting. The income summary account is employed to transfer the balances of revenue and expense accounts at the end of an accounting period. 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. When the accounting period ends, all the revenue accounts are closed when the credit balance is properly transferred. This involves debiting the revenue accounts to reset them with zero balance and crediting the final temporary account.

Once all the temporary accounts are compiled, the value of each account is then debited from the temporary accounts and credited as a single value to the income summary. The income summary account is at a credit position of $27,000 so that means to income summary account close the account, we need to debit the income summary account of that amount with the balancing side going to retained earnings. In the following financial year, the company starts the new year with adequate temporary accounts that start at zero.

Income Summary Account

The business incurred a purchase expense of $50,000, rent expense of $9,000, stationary of $900, ad expense of $1,000, the expense of utilities at $800 with salaries as $40,000. This indicates that a profit was made because a credit balance must be debited to the income summary. Looking at the revenue account balance, all the revenue-generating sources, whether operating or non-operating business functions are included in the process. Once all the revenue streams have been compiled, businesses credit them to transfer to the summary. In many computerized accounting systems, this process is performed automatically, and the income summary account is not visible to users. However, it remains a key concept in understanding how the accounting cycle works, especially in manual or educational contexts.

• This process involves several key steps, with income summary accounts serving as pivotal tools to facilitate the transition of balances from temporary to permanent accounts.
• The information from the income statement can be transferred to the income summary statement to establish whether a business made a profit or loss.
• The formula for calculating the total retained earnings is revenue minus expenses.
• In addition, it summarizes all the business functions, especially the operating and non-operating activities.
• That means CCC has earned a net profit of $27,000 for the year ended 31 December 2022.
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• The income summary account in a credit position means the company has made a profit and the income summary account in a debit position means the company has made a loss.