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    Mar262011

    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 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 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, 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. It is also possible that no income summary account will appear in the chart of accounts.

    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? 

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    Reader Comments (3)

    Is there any relationship between unappropriated retained earnings and inventory?

    December 17, 2011 | Unregistered CommenterSolomon

    No, there is no relationship.

    December 17, 2011 | Registered CommenterSteven Bragg

    Can we use transitional accounts for debiting capital expenditures?

    June 28, 2012 | Unregistered CommenterSahil
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