Income Summary

Income Summary

What is an Income Summary?

Definition

An income summary is a temporary account into which the balances of the revenue and expense accounts are transferred at the end of the accounting period. The net amount in the income summary account is the profit or loss for that period

What does income summary mean?

At the end of the accounting period, all the revenue accounts are closed by transferring the credit balances in them to the income summary account. This is done by debiting the revenue accounts and crediting the income summary account. Similarly, the expenses accounts are closed by crediting them and transferring the balance to the income summary account If the income summary account has a credit balance, the company has made a profit. A debit balance indicates a loss. This balance can now be transferred to the retained earnings account. At this stage, the income summary account, which is a temporary account opened to calculate the profit or loss for the accounting period, could be closed What is the purpose of creating an income summary account? Why can’t the balances in the revenue accounts and expense accounts be transferred directly to the retained earnings account? The main reason for creating an income summary account is to ensure that the profit or loss figure is calculated correctly. If account balances are transferred directly to the retained earnings account, there is a possibility of missing some accounts leading to an erroneous picture of profit or loss

Example of income summary

Hathaway Inc. closes its accounts on December 31, 2017. On that date, its revenue accounts have a credit balance of $8 million. Its expense accounts have the following balances: ⇨ Raw materials: $1 million ⇨ Salaries: $2 million ⇨ Other expenses: $4 million These accounts are transferred to the income summary account to determine the net profit for the year that ends on December 31, 2017. Income Summary The net profit of $1 million can now be transferred to the retained earnings account.

Summary

The income summary account is a temporary account into which the balances of the revenue accounts and expense accounts are transferred at the end of the accounting period. It is used for calculating the net profit or loss for the relevant period.