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.

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

Please revise journalizing closing entries here.

Here 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
Cost of goods sold8,000,000Revenues20,000,000
Selling expense4,000,000
Administrative expenses2,000,000
Finance cost1,000,000
Balance5,000,000
Income summary account$5 million
Retained earnings$5 million

Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork