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. 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.

1 Using the Adjusted Trial Balance to Prepare Financial Statements

The balance in Income Summary is the same figure as what is reported on Printing Plus’s Income Statement. The income summary account is an intermediary between revenues and expenses, and the Retained Earnings account. 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. This balance is then transferred to the Retained Earnings account. What is the current book value of your electronics, car, and furniture?

• The next and final step in the accounting cycle is to prepare one last post-closing trial balance.
• At this point in the accounting cycle, all the temporary accounts have been closed and zeroed out to permanent accounts.
• Next, the balance resulting from the closing entries will be moved to Retained Earnings (if a corporation) or the owner’s capital account (if a sole proprietorship).
• To update the balance in Retained Earnings, we must transfer net income and dividends/distributions to the account.
• The following points are important to highlight related to the above income summary account for Bob and his company, Bob’s Donut Shoppe, Inc.
• If it has a credit balance, it signifies a net profit, while a debit balance indicates a net loss.

Income summary account

Revenues and gains are recorded in accounts such as Sales, Service Revenues, Interest Revenues (or Interest Income), and Gain on Sale of Assets. These accounts normally have credit balances that are increased with a credit entry. When comparing the two columns, it is essential to look at their totals. If the credit balance exceeds the debit balance, it indicates a profit.

What Happens When a Business Revenue Account Is Closed?

At the end of a period, all the income and expense accounts transfer their balances to the income summary account. The income summary account holds these balances until final closing entries are made. Then the income summary account is zeroed out and transfers its balance to the retained earnings (for corporations) or capital accounts (for partnerships).

For instance, details about property, plant, and equipment are shown in Note 4 in the following sample notes to the financial statements. The notes help external users understand and analyze the financial statements. Below are the T accounts with the journal entries already posted.

Applying GAAP can present challenges when judgment must be applied as in the case of cost-benefit decisions and materiality. LO8 – Explain the purpose and content of the report that describes management’s responsibility for financial statements. As an integral part of its financial statements, a company provides notes to the financial statements. In accordance with the disclosure principle, notes to the financial statements provide relevant details that are not included in the body of the financial statements.

• Chapter 4 expands upon the content and presentation of financial statements.
• The final piece of information often included with the annual financial statements is a statement describing management’s responsibility for the accurate preparation and presentation of financial statements.
• If you are using accounting software, the transfer of account balances to the income summary account is handled automatically whenever you elect to close the accounting period.
• WSO provides its members with an Accounting Foundations course to master the necessary accounting skills.
• All companies have revenue and expense accounts, which need to be transferred into the company’s summary.
• Non-current liabilities, also referred to as long-term liabilities, are borrowings that do not require repayment for more than one year, such as the long-term portion of a bank loan or a mortgage.

Interest Revenues are nonoperating revenues or income for companies not in the business of lending money. For companies in the business of lending money, Interest Revenues are reported in the operating section of the multiple-step income statement. Expenses normally have debit balances that are increased with a debit entry. Since expenses are usually increasing, think “debit” when expenses are incurred. If you are using accounting software, the transfer of account balances to the income summary account is handled automatically whenever you elect to close the accounting period. It is entirely possible that there will not even be a visible income summary account in the computer records.

Written by Financial Accounting

An audit seeks not certainty, but reasonable assurance that the financial statement information is not materially misstated. Financial statements are often accompanied by an auditor’s report. An audit is an external examination of a company’s financial does income summary have a normal balance statement information and its system of internal controls. LO6 – Explain the purpose and content of notes to financial statements. We’ll use a company called MacroAuto that creates and installs specialized exhaust systems for race cars.

The Classified Balance Sheet