Income Summary Definition, How to Close, and Example

Temporary (nominal) accounts are accounts that are closed at the end of each accounting period, and include income statement, dividends, and income summary accounts. These accounts are temporary because they keep their balances during the current accounting period and are set back to zero when the period ends. Revenue and expense accounts are closed to Income Summary, and Income Summary and Dividends are closed to the permanent account, Retained Earnings. All revenue accounts will be closed at the conclusion of the accounting period.

We do this by transferring the credit amount to the income summary. The revenue accounts will be debited, and the income summary account will be credited. All revenue accounts will become zero after this entry is completed.

Profit and income Statement

Are the value of your assets and liabilities now zero because of the start of a new year? Your car, electronics, and furniture did not suddenly lose all their value, and unfortunately, you still have outstanding debt. Therefore, these accounts still have a balance in the new year, because they are not closed, and the balances are carried forward from December 31 to January 1 to start the new annual accounting period.

How to Close an Income Summary Account

An income summary is a summary of income and expenses for a certain period, with the result being profit or loss. It is a necessary instrument for the preparation of financial statements. It acts as a checkpoint and reduces errors in financial statement preparation by directly define the income summary account transferring the balance from revenue and spending accounts. Notice that revenues, expenses, dividends, and income summary all have zero balances. The post-closing T-accounts will be transferred to the post-closing trial balance, which is step 9 in the accounting cycle.

• A high level of total current income, for example, combined with a relatively low level of income from the major operating activities may imply reduced total income in the future.
• When you compare the retained earnings ledger (T-account) to the statement of retained earnings, the figures must match.
• It acts as a checkpoint and reduces errors in financial statement preparation by directly transferring the balance from revenue and spending accounts.
• Retained Earnings is the only account that appears in the closing entries that does not close.
• The account has a zero balance throughout the entire accounting period until the closing entries are prepared.
• Also, all of the expense accounts balance in the debit side column as the organization’s total spending.