Which account would be closed to the income summary account at the end of a period?
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November 19, 2022/ Steven Bragg
The income summary account is a temporary 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
net 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 one 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 to 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 to take in using the income summary account, after which the account should have a zero balance. Why the Income Summary Account is UsedThe income summary account is an intermediate point at which revenue and expense totals are accumulated before the resulting profit or loss passes through to the retained earnings account. As such, the account is not strictly necessary. However, it can provide a useful audit trail, showing how these aggregate amounts were passed through to retained earnings. Example of the Income Summary AccountThe following journal entries show how to use the income summary account: 1. Shift all $10,000 of revenues generated during the month to the income summary account:
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. Which Accounts are Closed at Year End?At the end of a company's fiscal year, all temporary accounts should be closed. Temporary accounts accumulate balances for a single fiscal year and are then emptied. Conversely, permanent accounts accumulate balances on an ongoing basis through many fiscal years, and so are not closed at the end of the fiscal year. At the end of the fiscal year, closing entries are used to shift the entire balance in every temporary account into retained earnings, which is a permanent account. The net amount of the balances shifted constitutes the gain or loss that the company earned during the period. Once the year-end processing has been completed, all of the temporary accounts have been emptied and therefore "closed" for the current fiscal year. A flag in the accounting software is then set to close down the old fiscal year, which means that no one can enter transactions during that time period. Another flag can be set to open the next fiscal year, at which point the same temporary accounts are opened, now with zero balances, and are used to begin accumulating transactional information for the next fiscal year. Thus, the only accounts closed at year end are temporary accounts. Permanent accounts remain open at all times. Types of Temporary AccountsThe most common types of temporary accounts are for revenue, expenses, gains, and losses - essentially any account that appears in the income statement. In addition, the income summary account, which is an account used to summarize temporary account balances before shifting the net balance elsewhere, is also a temporary account. Examples of temporary accounts are revenue, cost of goods sold, rent expense, utilities expense, compensation expense, and benefits expense. Types of Permanent AccountsPermanent accounts are those that appear on the balance sheet, such as asset, liability, and equity accounts. Examples of permanent accounts are cash, marketable securities, accounts receivable, fixed assets, accounts payable, and common stock. What accounts are closed to the income summary account?The purpose of the income summary account is simply to keep the permanent owner's capital or retained earnings account uncluttered. Close the owner's drawing account to the owner's capital account. In corporations, this entry closes any dividend accounts to the retained earnings account.
What account is closed to income Summary at the end of the accounting period?All expenses are closed out by crediting the expense accounts and debiting income summary. Third, the income summary account is closed and credited to retained earnings.
Which accounts are closed at the end of each accounting period?Temporary accounts in accounting refer to accounts you close at the end of each period. Temporary accounts are general ledger accounts. All income statement accounts are considered temporary accounts.
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