Income Summary Account
Income summary account is a ledger account used in the closing stage of the accounting cycle. It holds all income and expense balances and helps in determining net income or net loss for the period. The net balance of the income summary account is transferred to the retained earnings account.
In the closing stage, all revenue accounts are transferred to the income summary account by debiting the individual revenue accounts by their closing balance and crediting the corresponding balance to the income summary account. Similarly, 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 credit balance of the income summary account is greater than the debit balance, the excess is a net income but if the debit balance is higher than the credit balance, it represents a net loss.
A net income is 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.
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.
Please revise journalizing closing entries here.
|Income Summary Account|
|Cost of goods sold||8,000,000||Revenues||20,000,000|
|Income summary account||$5 million|
|Retained earnings||$5 million|
Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork