Income Summary Account

The income summary account is a temporary account used at the end of an accounting period as part of the closing process. All revenue and expense account balances are transferred into it, so that its balance equals the period's net income or net loss. That balance is then moved to retained earnings in a corporation, or to the owner's capital account in a sole proprietorship or partnership. After the closing entries are posted, the income summary account, like every revenue and expense account, has a zero balance and is ready for the next period.

The account is a bookkeeping device rather than a reporting item. It never appears on the financial statements, and it exists only for a brief time at period end. Its purpose is to give a clear audit trail showing how revenues and expenses were brought together and how the result reached equity. Some businesses and many software systems skip it and close revenues and expenses directly to retained earnings, which produces the same final result.

Revenue, expense and dividend or drawing account balances are temporary, or nominal, accounts. They measure activity for a single period, so they must start each new period at zero. Asset, liability and equity accounts are permanent, or real, accounts whose balances carry forward. The closing process, the final stage of the accounting cycle, resets the temporary accounts and updates retained earnings so that the balance sheet reflects the period's result.

When an income summary account is used, closing normally takes four closing entries, made after the adjusted trial balance is prepared:

1. Each revenue account is debited for its balance and the income summary account is credited for the total.
2. Each expense account is credited for its balance and the income summary account is debited for the total.
3. The income summary account is closed to retained earnings: if it has a credit balance (net income), it is debited and retained earnings is credited; if it has a debit balance (net loss), the reverse applies.
4. The dividends account, or the owner's drawing account, is closed directly to retained earnings or capital. Dividends do not pass through income summary because they are distributions, not expenses.

At 31 December, a consulting firm's adjusted trial balance shows service revenue of $480,000 and interest revenue of $5,000, and expenses of $210,000 for salaries, $36,000 for rent, $12,000 for utilities and $18,000 for depreciation. It declared $40,000 of dividends.

• Closing revenues: debit service revenue $480,000 and interest revenue $5,000, credit income summary $485,000.
• Closing expenses: debit income summary $276,000, credit each expense account for its balance.
• Income summary now has a credit balance of $485,000 minus $276,000, which is $209,000, equal to net income.
• Closing income summary: debit income summary $209,000, credit retained earnings $209,000.
• Closing dividends: debit retained earnings $40,000, credit dividends $40,000.

Retained earnings increase by a net $169,000. All temporary accounts, including income summary, are now zero.

After closing, accountants prepare a post-closing trial balance, which should list only permanent accounts. If any revenue, expense, dividend or income summary account still shows a balance, closing was incomplete. Common mistakes include closing dividends to income summary, which would understate net income in the closing records; forgetting to close the income summary account itself; and closing permanent accounts such as accumulated depreciation by mistake. The balance in income summary before its own closing entry is a useful check, since it should match the net income shown on the income statement. Closing is usually done at each year-end close, although some businesses close monthly in their internal systems.