What is the income summary account?

The income summary account is a transitional account into which all income statement revenue and expense accounts are transferred at the end of an accounting period. The net amount transferred into the income summary account equals the net profit or loss that the business incurred during the period. 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.

Likewise, shifting expenses out of the income statement requires you to credit all of the expense accounts for the total amount of expenses recorded in the period, and debit the income summary account. This is the first step you would take in using the income summary account.

If the resulting balance in the income summary account is a profit (which is a credit balance), then you would debit the income summary account for the amount of the profit and credit the retained earnings account to shift the profit into retained earnings (which is a balance sheet account). Conversely, if the resulting balance in the income summary account is a loss (which is a debit balance), then you would credit the income summary account for the amount of the loss and debit the retained earnings account to shift the loss into retained earnings. This is the second step you would take in using the income summary account, after which the account should have a zero balance.

The following journal entries show how you would use the income summary account:

1. Shift all $10,000 of revenues generated during the month to the income summary account:

	Debit	Credit
Revenue	10,000
Income summary		10,000

2. Shift all $9,000 of expenses generated during the month to the income summary account (there is assumed to be just one expense account):

	Debit	Credit
Income summary	9,000
Expenses		9,000

3. Shift the $1,000 net profit balance in the income summary account to the retained earnings account:

	Debit	Credit
Income summary	1,000
Retained earnings		1,000

If you are using accounting software, then the transfer of account balances to the income summary account is handled for you 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.

Related Topics

The trial balance
What are final accounts?
What is a nominal account?
What is an adjusted trial balance?
What is an unadjusted trial balance? 

Comments

[Solomon]

Is there any relationship between unappropriated retained earnings and inventory?

[Steven Bragg]

No, there is no relationship.

[Sahil]

Can we use transitional accounts for debiting capital expenditures?