Income Summary Account | Example, Advantages, Disadvantages (2024)

The income summary is an intermediate account to which the balances of the revenue and expenses are transferred at the end of the accounting cycle through the closing entries. This way each temporary account can be reset and start with a zero balance in the next accounting period.

The credit balance of the revenue account is transferred by debiting the revenue account and crediting the income summary account. Similarly, the debit balances on the expense’s accounts are transferred and zeroed out by debiting the income summary and crediting the individual expenses account.

The Accounting Cycle Example

Throughout this series on the accounting cycle, we will look at an example business, Bob’s Donut Shoppe, Inc., to help understand the concepts of each part of the accounting cycle. Below is the complete list of accounting cycle tutorials:

Journal Entries
T-Accounts
Unadjusted Trial Balance
Adjusting Entries
Adjusted Trial Balance
Preparing Financial Statements
Accounting Worksheet
Closing Entries
Income Summary Account (you are here)
Post-Closing Trial Balance
Reversing Entries

We also have an accompanying spreadsheet which shows you an example of each step.

Click here to download the Accounting Cycle template

Income Summary Advantages

The advantages of having an income summary account are the following:

It gives complete information related to the revenue and expenses of the company in one place
Useful for investors and shareholders to determine the financial performance of a company for a given time period and make key decisions accordingly
Income summary accounts of the previous periods can be studied for a comparative analysis
Helps in tax filing as all the relevant information is in one summary account
To ensure that the profit and loss amount has been correctly calculated
To provide an audit trail for the accounts to know where the amounts have been transferred

Income Summary Disadvantages

Some of the disadvantages of an income summary also discussed below:

Income Summary vs Income Statement

There is often confusion between these two concepts due to their similar name. The following are some of the differences:

The income statement is a permanent account that reflects the revenue and expenses of a company for a given period. The income summary, on the other hand, is a temporary account that is useful for only closing the revenue and expenses accounts and transferring the balance to retained earnings.
The income statement is a financial statement. The revenue and expense account balances on the income statement are transferred to the income summary account.
The income statement is used to record expenses and revenues. The income summary account is used to close out the books.

Closing the Income Summary Account

As discussed earlier, when choosing to close the individual accounts, a company can choose to directly transfer the balance of the accounts to retained earnings or go through an intermediate account called the income summary account. We have already discussed the pros and cons of each method in detail in the previous section. Choosing an income summary account to close the books will entail the following steps:

The individual revenue and expense accounts appearing on the income statements are transferred to the income summary account. This can be done by debiting revenue accounts and crediting expense accounts.
The balances of the amounts transferred should match with the net income or loss for the year for the company.
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.

Income Summary Example

Continuing with Bob’s Donut Shoppe example, we see how the income statement to used to close out the temporary accounts of revenue and expenses and how the balances for these are shifted to the retained earnings account.

Bob’s Income summary account for the year should look something like this:

Income Summary Account | Example, Advantages, Disadvantages (1)

The following points are important to highlight related to the above income summary account for Bob and his company, Bob’s Donut Shoppe, Inc.

Next Steps

The post-closing trial balance report lists down all the individual accounts after accounting for the closing entries. At this point in the accounting cycle, all the temporary accounts have been closed and zeroed out to permanent accounts. Therefore, a post-closing trial balance will include a list of all permanent accounts that still have balances. This will be identical to the items appearing on a balance sheet.

FAQs

1. What is the income summary account?

The income summary account is an intermediate account that is used to close the books. It is used when a company chooses to transfer the balance of individual revenue and expense accounts directly to retained earnings. The income summary account is also used when a company chooses to close the books using an income statement.

2. How do you record income summary account?

The income summary account is recorded 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. This marks the closing of the income summary account.

3. What is the purpose of an income summary account?

The purpose of an income summary account is to close the books. It is used when a company chooses to transfer the balance of individual revenue and expense accounts directly to retained earnings or when a company chooses to close the books using an income statement.

4. What is another name for income summary account?

The income summary account is also known as the temporary income statement account. Temporary accounts are those that are closed at the end of an accounting cycle. They do not continue onto the next accounting cycle.

5. How is income summary account prepared?

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. This marks the closing of the income summary account.

As an accounting expert with years of experience in both theory and practice, I've delved deep into various aspects of financial management, including the intricate mechanisms of the accounting cycle. Throughout my career, I've not only studied these concepts extensively but have also applied them in real-world scenarios, guiding businesses through the complexities of financial reporting and analysis.

Now, let's dissect the article you provided, covering each concept mentioned:

Income Summary Account:
- It serves as an intermediary account in the accounting cycle.
- Balances of revenue and expenses are transferred here during closing entries to reset temporary accounts for the next accounting period.
Advantages of Income Summary Account:
- Provides comprehensive information on company revenue and expenses.
- Useful for investors to gauge financial performance.
- Facilitates comparative analysis across periods.
- Assists in tax filing and auditing processes.
Disadvantages of Income Summary Account:
- Doesn't reflect cash flow situation.
- Requires historical data for comparative analysis.
- Balance (profit or loss) determination based on debit and credit sides.
Closing the Income Summary Account:
- Revenue and expense accounts are transferred to the income summary account.
- Balances should match the net income or loss.
- Income summary balance is then transferred to retained earnings or capital account.
Income Summary Example (using Bob’s Donut Shoppe, Inc.):
- Revenue accounts on credit side, expenses on debit side.
- Retained earnings appears based on profit or loss.
- Illustrates the closing process for temporary accounts.
Income Summary vs Income Statement:
- Income statement is permanent, reflecting revenue and expenses for a period.
- Income summary is temporary, used for closing temporary accounts and transferring balances to retained earnings.
Next Steps:
- Post-closing trial balance lists permanent accounts after closing entries.
- Provides a snapshot of financial position for balance sheet preparation.

Additionally, the article includes FAQs covering key aspects like the purpose, preparation, and recording of the income summary account, as well as alternative names for it.

This comprehensive overview highlights the importance of the income summary account in the broader context of financial accounting, demonstrating its role in facilitating accurate reporting and analysis within the accounting cycle.