Transferring the expense account balances to the Income Summary account is the
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The income summary account is a temporary account used to store income statement account balances, revenue and expense accounts, during the closing entry step of the accounting cycle. In other words, the income summary account is simply a placeholder for account balances at the end of the accounting period while closing entries are being made. At the end of each accounting period, all of the temporary accounts are closed. You might have heard people call this
“closing the books.” Temporary accounts like income and expenses accounts keep track of transactions for a specific period and get closed or reset at the end of the period. This way each accounting period starts with a zero balance in all the temporary accounts, so revenues and expenses are only recorded for current years. There are two ways to close temporary accounts. You
can either close these accounts directly to the retained earnings account or close them to the income summary account. Closing temporary accounts to the income summary account does take an extra step, but it also provides and an audit trail showing the revenues, expenses, and net
income for the year. Once the temporary accounts are closed to the income summary account, the balances are held there until final closing entries are made. This provides a useful check for errors. Once all the temporary accounts are closed, the balance in the income summary account should be equal to the net income of the company for the year. Then the income summary account is zeroed out and transfers its balance to the retained earnings (for corporations) or capital accounts (for
partnerships). This transfers the income or loss from an income statement account to a balance sheet account. This is the only time that the income summary account is used. For the rest of the year, the income summary account maintains a zero balance. After Paul’s Guitar Shop prepares its closing entries, the income summary account has a balance equal to its net income for the year. This balance is then transferred to the retained earnings account in a journal entry like this. After this entry is made, all temporary accounts, including the income summary account, should have a zero balance. Now that Paul’s books are completely closed for the year, he can prepare the post closing trial balance and reopen his books with reversing entries in the next steps of the accounting cycle. Contents
 What Is a Closing Entry?A closing entry is a journal entry made at the end of accounting periods that involves shiftingdata from temporary accounts on the income statement to permanent accounts on the balance sheet. Temporary accounts include revenue, expenses, and dividends, and these accounts must be closed at the end of the accounting year. Key Takeaways:
How to Make a Closing EntryUnderstanding Closing EntriesThe purpose of the closing entry is to reset the temporary account balances to zero on the general ledger, the record-keeping system for a company's financial data. 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 are reported in defined periods and are not carried over into the future. For example, $100 in revenue this year does not count as $100 of revenue for next year, even if the company retained the funds for use in the next 12 months. Permanent accounts, on the other hand, track activities that extend beyond the current accounting period. They are housed on the balance sheet, a section of the financial statements that gives investors an indication of a company’s value, including its assetsand liabilities. Any account listed on the balance sheet, barring paid dividends, is a permanent account. On the balance sheet, $75 of cash held today is still valued at $75 next year, even if it is not spent. As part of the closing entry process, the net income (NI) is moved into retained earnings on the balance sheet. The assumption is that all income from the company in one year is held onto for future use. Any funds that are not held onto incur an expense that reduces NI. One such expense that is determined at the end of the year is dividends. The last closing entry reduces the amount retained by the amount paid out to investors. Income Summary AccountTemporary account balances can either be shifted directly to the retained earnings account or to an intermediate account known as the income summary account beforehand. Income summary is a holding account used to aggregate all income accounts except for dividend expenses. Income summary is not reported on any financial statements because it is only used during the closing process, and at the end of the closing process the account balance is zero. Income summary effectively collects NI for the period and distributes the amount to be retained into retained earnings. Balances from temporary accounts are shifted to the income summary account first to leave an audit trail for accountants to follow. Recording a Closing EntryThere is an established sequence of journal entries that encompass the entire closing procedure:
ImportantModern accounting software automatically generates closing entries. Special ConsiderationsIf a company’s revenues are greater than its expenses, the closing entry entails debiting income summary and crediting retained earnings. In the event of a loss for the period, the income summary account needs to be credited and retained earnings reduced through a debit. Finally, dividends are closed directly to retained earnings. The retained earnings account is reduced by the amount paid out in dividends through a debit, and the dividends expense is credited. Where do you transfer the balance of the income Summary account?The income summary account balance is then transferred to the retained earnings account in the case of a corporation or the capital account in the case of a sole proprietorship. This will mark the closing of the income summary account.
How do you close an expense account to an income summary?In order to close out your expense accounts, you will need to debit the income summary account, and credit each line item expense listed in the trial balance, which reduces the expense account balances to zero. When closing expenses, you should list them individually as they appear in the trial balance.
Which accounts are usually transferred to the income statement?Operating revenues. Operating expenses. Non-operating revenues and gains. Non-operating expenses and losses.
What is a summary of income and expenses called?Also known as profit and loss (P&L) statements, income statements summarize all income and expenses over a given period, including the cumulative impact of revenue, gain, expense, and loss transactions.
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