An Overview of Income Summary Account
When an accounting period has come to an end, the accountants will transfer the balances in the revenue and expense accounts into the income summary account (Also see Accounting tasks to consider before the year ends). This account is a type of temporary account. The net amount that the accountant has transferred to this account should be equal to the net profit or net loss the company has experienced in that particular accounting period. The process of creating the income summary account is essential in determining whether the company has gained profit or suffer from losses so that the business owners know their financial position well. Hence, as a business owner, you should hire an accounting firm Johor Bahru if you are not familiar with accounting tasks.
The first step of creating an income summary account is to move the revenues and expenses of that accounting period out of the company’s profit and loss statement using appropriate double entry accounting. When the accountant moves the revenues out of the profit and loss statement, he needs to debit the total amount of revenue to the revenue account, and credit the same amount to income summary account. Similarly, when the accountant moves the expenses out of the profit and loss statement, he needs to debit the total amount of expenses to the income summary account, and credit the same amount to the expense account.
After completing the steps above, two different situations may arise, where the income summary may show a debit balance or a credit balance.
– If it is a debit balance, it means that the company has suffered a loss. The accountant should debit the amount of the loss to the retained earnings account (to transfer the loss to the company’s retained earnings) and credit the same amount to the income summary account.
– If it is a credit balance, it means that the company has earned a profit. The accountant should debit the amount of the profit to the income summary account and credit the same amount to the retained earnings account (to transfer the loss to the company’s retained earnings).
When the accountant has finished doing so, the income summary account should have a zero balance (Also see Steps to Prepare Trial Balance).
For you to understand the way the accountants would deal with the income summary account, let us look at the example below:
XYZ corporation has earned revenues of RM50,000. So, the accountant should transfer the revenues into the income summary account by using the accounting entries as follows:
– Debit RM50,000 to revenue account
– Credit RM50,000 to income summary account
At the same time, it has incurred expenses of RM35,000. Therefore, the accountant needs to transfer the expenses into the income summary account by using the entries:
– Debit RM35,000 to income summary account
– Credit RM35,000 to expense account
Hence, in the income summary account, there will be a RM15,000 net profit balance. To transfer the balance to the retained earnings account, which is a balance sheet account, the accountant should:
– Debit RM15,000 to the income summary account
– Credit RM15,000 to the retained earnings account
If the firm uses accounting software to record its transactions, when the accountant chooses to close a particular accounting period, the software will transfer the balances of the accounts to the income summary account automatically. Also, do not be surprised if you do not see the income summary account in your company’s computer records as this is very common. You may not see the income summary account in the chart of accounts too.