Income Summary Account

Income summary account is a temporary account used in the closing stage of the accounting cycle to compile all income and expense balances and determine net income or net loss for the period. The net balance of the income summary account is closed to the retained earnings account.

In the closing stage, balances in all income accounts are transferred to the income summary account by debiting the individual income accounts by their closing balance and crediting the corresponding balance to the income summary account. Similarly, balances in all expense accounts are transferred to the income summary account by crediting the individual accounts by their closing balance and debiting the corresponding balance to the income summary account.

If the income summary account has a net credit balance i.e. when the sum of the credit side is greater than the sum of the debit side, the company has a net income for the period. Conversely, if the income summary account has a net debit balance i.e. when the sum of the debit side is greater than the sum of the credit side, it represents a net loss.

An income summary account is effectively a T-account of the income statement. Since it is a temporary ledger account, it does not appear on any financial statement.

A net income is closed/transferred to retained earnings by debiting income summary account and crediting retained earnings account while a net loss is transferred by crediting income summary account and debiting retained earnings account. Once this process is complete, a post-closing trial balance is prepared which helps in preparation of the balance sheet.

Example

In the financial year 2012, PC Ltd. had total revenues of $20 million. It used three expense accounts with the following balances:

Cost of goods sold$8 million
Selling expense$4 million
Administrative expense$2 million
Finance cost$1 million

Post the transactions to the income summary account and close the income summary account.

Solution

Income Summary Account
Cost of goods sold8,000,000Revenues20,000,000
Selling expense4,000,000
Administrative expenses2,000,000
Finance cost1,000,000
Balance5,000,000

In this case, the income summary account has a net credit balance which means that the company has a net income of $5 million.

The income summary account is closed by taking the net balance to retained earnings as follows:

Income summary account$5 million
Retained earnings$5 million

by Obaidullah Jan, ACA, CFA and last modified on

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