These accounts must be closed at the end of the accounting year. The income summary account is prepared by debiting revenue accounts and crediting expense accounts. The balances of the transferred amounts should match with the net income or loss for the year. The income summary account balance is then transferred to retained earnings or the capital account in the case of a sole proprietorship. If the credit balance is more than the debit balance, it indicates the profit; if the debit balance is more than the credit balance, it shows the loss. In the last net sales credit or debit balance, whatever may become, it will be transferred into retained earnings or capital account in the balance sheet, and the income summary will be closed.

Closing Entry: What It Is and How to Record One

• It allows for transactions to be reflected correctly in the right financial period as long as it is accurately closed out at the end of every financial period.
• If the credit balance is greater than the debit balance, the profit is indicated.
• Each of these accounts must be zeroed out so that on the first day of the year, we can start tracking these balances for the new fiscal year.
• The debit to income summary should agree to total expenses on the Income Statement.
• The net balance of the income summary account is closed to the retained earnings account.
• An income summary account is a temporary account used at the end of an accounting period to collect all revenue and expense account balances.

Therefore, it will not appear on any trial balances, including the adjusted trial balance, and will not appear on any of the financial statements. We also do this by Bookkeeping for Etsy Sellers transferring the debit to the income summary by crediting the costs account and debiting the income summary account. Following the completion of this entry, the balance of all expense accounts will be zero.

• The net income (NI) is moved into retained earnings on the balance sheet as part of the closing entry process.
• Printing Plus has a $4,665 credit balance in its Income Summary account before closing, so it will debit Income Summary and credit Retained Earnings.
• Before passing those entries, there are a few processes and steps to be followed to reach that stage.
• The balance in Retained Earnings agrees to the Statement of Retained Earnings and all of the temporary accounts have zero balances.
• The general rule is that balance sheet accounts are permanent accounts and income statement accounts are temporary accounts.
• Assets, liabilities and most equity accounts are permanent accounts.
• Income summary account is a temporary account used to make closing entries.

How to create closing entries

And without closing expense accounts, you couldn’t compare your business expenses from period to period. Sam’s books are now totally closed for the year, and he may income summary account create the post-closing trial balance and reopen his books with reverse entries in the following steps of the accounting cycle. Thus, accumulating revenue and spending totals before the resulting profit or loss is passed through to the retained earnings account. It can, however, provide a useful audit trail by demonstrating how these aggregate amounts were carried through to retained earnings. Temporary accounts are used to record accounting activity during a specific period. All revenue and expense accounts must end with a zero balance because they’re reported in defined periods.

TIMES EARNED INTEREST RATIO (TIE Ratio): Definition, Formula and Uses

• This process transfers balances from temporary to permanent accounts, highlighting when closing entries are made for accurate financial reporting.
• In accounting, there are multiple types of accounts classified as assets, liabilities, equity, revenues or expenses.
• Thus, shifting revenue out of the income statement means debiting the revenue account for the total amount of revenue recorded in the period, and crediting the income summary account.
• The purpose of an income summary account is to close the books.
• Closing the income summary account is done after all income sources are accounted as retained earnings of the organization.

The income summary account receives the balance at year end from the revenue and expense accounts. Once that’s completed, the income summary account is closed as well by transferring its balance to a capital account. We see from the adjusted trial balance that our revenue accounts have a credit balance. To make them zero we want to decrease the balance or do the opposite. We will debit the revenue accounts and credit the Income Summary account. The credit to income summary should equal the total revenue from the income statement.

• An accounting period is any duration of time that’s covered by financial statements.
• The income summary account is important for any accountant or business owners that are preparing financial statements.
• The process of closing entries in accounting ensures the temporary accounts have a balance of zero at the end of the period.
• The first part is the date of declaration, which creates the obligation or liability to pay the dividend.
• Overall, in 2022, their income across all sources accounted for a mammoth $2.4 billion or $5.41 for each diluted common share.
• And without closing expense accounts, you couldn’t compare your business expenses from period to period.
• Therefore, a post-closing trial balance will include a list of all permanent accounts that still have balances.

Instead of focusing on the fear and anger, she started her accounting and consulting firm. In the last 10 years, she has worked with clients all over the country and now sees her diagnosis as an opportunity that opened doors to a fulfilling life. Kristin is also the creator of Accounting In Focus, a website for students taking accounting courses.