Income Summary Definition, How to Close, and Example

When entering net income, it should be written in the column with the lower total. You then add together the $5,575 and $4,665 to get a total of $10,240. If you review the income statement, you see that net income is in fact $4,665. Notice that the balances in the expense accounts are now zero and are ready to accumulate expenses in the next period. The Income Summary account has a new credit balance of $4,665, which is the difference between revenues and expenses in Figure 1.29.

Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.

Using Income Summary in Closing Entries

US GAAP has no requirement for reporting prior periods, but the SEC requires that companies present one prior period for the Balance Sheet and three prior periods for the Income Statement. Under both IFRS and US GAAP, companies can report more than the minimum requirements. Total expenses are subtracted from total revenues to get a net income of $4,665. If total expenses were more than total revenues, Printing Plus would have a net loss rather than a net income. This net income figure is used to prepare the statement of retained earnings.

• You want to calculate the net income and enter it onto the worksheet.
• It is important to understand retained earnings is not closed out, it is only updated.
• The business and auditors can always go back to such statements to determine and investigate any amounts they think are doubtful or just want to cross verify for investigation purposes.
• Even though they are the same numbers in the accounts, the totals on the worksheet and the totals on the balance sheet will be different because of the different presentation methods.
• If your revenues are greater than your expenses, you will debit your income summary account and credit your retained earnings account.

It also helps the company keep thorough records of account balances affecting retained earnings. Revenue, expense, and dividend accounts affect retained earnings and are closed so they can accumulate new balances in the next period, which is an application of the time period assumption. When doing closing entries, https://investrecords.com/the-importance-of-accurate-bookkeeping-for-law-firms-a-comprehensive-guide/ try to remember why you are doing them and connect them to the financial statements. To update the balance in Retained Earnings, we must transfer net income and dividends/distributions to the account. By closing revenue, expense and dividend/distribution accounts, we get the desired balance in Retained Earnings.

Income summary account

As you will learn in Corporation Accounting, there are three components to the declaration and payment of dividends. The first part is the date of declaration, which creates the obligation or liability to pay the dividend. The second part is the date of record that determines who receives the dividends, and the third part is the date of payment, which is the date that payments are made.

Temporary accounts are used to record accounting activity during a specific period. All revenue and expense accounts must end with a zero balance because they are reported in defined periods and are not carried over into the future. For example, $100 in revenue this year does not count as $100 of revenue for next year, even if the company retained the funds for use in A Deep Dive into Law Firm Bookkeeping the next 12 months. If the income summary account has a debit balance before it is closed the company has NET LOSS for the period. A net loss would decrease retained earnings so we would do the opposite in this journal entry by debiting Retained Earnings and crediting Income Summary. The income summary account is also known as the temporary income statement account.