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• The post-closing T-accounts will be transferred to the post-closing trial balance, which is step 9 in the accounting cycle.
• The purpose of the income summary account is to facilitate the process of closing temporary accounts and transfer their balances into the retained earnings account.
• The income statement generally comprises permanent accounts and displays the business’s income earned and expenses incurred by the business.
• The income summary account is a temporary account into which all income statement revenue and expense accounts are transferred at the end of an accounting period.
• You should recall from your previous material that retained earnings are the earnings retained by the company over time—not cash flow but earnings.
• If you put the revenues and expenses directly into retained earnings, you will not see that check figure.

There are four closing entries, which transfer all temporary account balances to the owner’s capital account. When it comes to accounting a closing entry is one of the crucial steps to finalizing an accounting period. This type of entry is made at the end of an accounting period and its purpose is to zero out all temporary accounts so that they are ready to be used in the next accounting period. Without closing entries, a company’s financial statements would be inaccurate and incomplete. While the income statement is used for recording expenses and revenues for a given accounting period, the income summary account holds closing records of revenues and expenses. The income summary is, therefore, a temporary account as it holds a zero balance throughout the year until the year ending closing entries are made.

What Happens When a Business Revenue Account Is Closed?

The income statement is also known as a profit and loss statement, statement of operation, statement of financial result or income, or earnings statement. After revision to IAS 1 in 2003, the Standard is now using profit or loss for the year rather than net profit or loss or net income as the descriptive term for the bottom line of the income statement. “Bottom line” is the net income that is calculated after subtracting the expenses from revenue. Since this forms the last line of the income statement, it is informally called “bottom line.” It is important to investors as it represents the profit for the year attributable to the shareholders. The following income statement is a very brief example prepared in accordance with IFRS.

• It is the end of the year, December 31, 2018, and you are reviewing your financials for the entire year.
• The business owners can refer to this document to see if the strategies have paid off.
• The business and auditors can always go back to such statements to determine and investigate any amounts they think are doubtful or just want to cross verify for investigation purposes.
• Accountants transfer its closing entries into the Retained Earnings account consequently resulting in its closing.
• There are four closing entries, which transfer all temporary account balances to the owner’s capital account.
• This way each accounting period starts with a zero balance in all the temporary accounts.

During the accounting period, you earned $5,000 in revenue and had $2,500 in expenses. On the statement of retained earnings, we reported the income summary account ending balance of retained earnings to be $15,190. We need to do the closing entries to make them match and zero out the temporary accounts.

Next Steps

The income summary account is an intermediate point at which revenue and expense totals are accumulated before the resulting profit or loss passes through to the retained earnings account. However, it can provide a useful audit trail, showing how these aggregate amounts were passed through to retained earnings. Likewise, shifting expenses out of the income statement requires one to credit all of the expense accounts for the total amount of expenses recorded in the period, and debit the income summary account.

The income statement generally comprises permanent accounts and displays the business’s income earned and expenses incurred by the business. The income summary is a summarization and compilation of temporary accounts of the revenues and expenses. The information from the income statement can be transferred to the income summary statement to establish whether a business made a profit or loss. Whenever such a thing happens, the accounts in the income statement are debited, and accounts in the income summary are credited.

Close expense accounts

Whether you credit or debit your income summary account will depend on whether your revenue is more than your expenses. For example, if your accounting periods last one month, use month-end closing entries. Whatever accounting period you select, make sure to be consistent and not jump between frequencies. The amounts are transferred into an income summary account to determine the net profit for the given financial year. The business has earned interest income of $8,000, revenues of $90,000, and miscellaneous income of $7,400.

It stores all of the closing information for revenues and expenses, resulting in a “summary” of income or loss for the period. The balance in the Income Summary account equals the net income or loss for the period. It indicates how the revenues (also known as the “top line”) are transformed into the net income or net profit (the result after all revenues and expenses have been accounted for). The purpose of the income statement is to show managers and investors whether the company made money (profit) or lost money (loss) during the period being reported. The income summary account is a temporary account that is used to close all revenues and expenses of the company.