What is the Income Summary Account?
Definition: Income summary is a special type of financial account whereby balances of revenue and expenses for a given accounting period are transferred. Being a summary account, it is designed to receive all temporary accounts made up of revenues and expenses at the end of each accounting period. In this case, the values of each account are credited in the income summary account.
Understanding Income Summary
The income summary account comes with two sides: the credit and debit size. The shifting of revenue out of an income statement translates to the debiting of the revenue account and crediting the income summary account. Likewise shifting expenses from the income statement requires one to credit all expenses incurred in a given period and debiting the income summary account
The net amount of revenue and expenses transferred into the income summary account translates to a net profit or net loss. A net profit occurs when the income summary account has a credit balance. Likewise, a profit occurs when the credit side in the income summary account is higher than the debit side. The amount is often transferred into the retained earnings account.
If the resulting balance in the income summary account is a debit balance, then the same amounts to a net loss, which is also transferred into the retained earnings account. Similarly, a net loss occurs when the debit side in the income summary account is higher than the credit side.
Once the net profit or loss is ascertained and transferred’ to the retained earnings, the income summary account being a temporary account cease to exist having served its purpose.
Income Summary Example
Consider company XYZ that closes accounts on December 31 2019. The revenue accounts indicate a credit balance of $4 million. The expense accounts, on the other hand, indicate $0.5 million for raw materials, $1 million for salaries and $1 million for other expenses.
The amounts are transferred into an income summary account to determine the net profit for the given financial year.
| XYZ Inc. | |||
| Income Summary Account On December 31, 2019 | |||
| Raw Materials | $500,000 | Revenues | $4,000,000 |
| Salaries | $1,000,000 | ||
| Other Expenses | $1,000,000 | ||
| Balance | $1,500,000 | ||
The net profit, which in this case is $1, 500,000, can be transferred into the retained earnings account.
Income Summary vs. Income Statement
While both the income summary and income statement provide a report on the net profit and loss of a company, they differ a great deal.
The main difference between the two has to do with the fact that an income statement is a permanent account that highlights all the income and expenses. The income summary, on the other hand, is a temporary account that compiles revenues and expenses.
Likewise, income statement details are often transferred to the income summary accounts whereby expenses are deducted from revenues to ascertain whether a firm made a profit or a loss. Any amounts transferred from the income statement are debited’ from the accounts and credited in the income summary account.
While the income statement is used for recording expenses and revenues for a given accounting period, the income summary account holds closing records of revenues and expenses. The income summary is, therefore, a temporary account as it holds a zero balance throughout the year until the year ending closing entries are made. Accountants transfer its closing entries into the Retained Earnings account consequently resulting in its closing.
Income Summary Purpose
Income summary account serves the purpose of ensuring the correct calculation of profit and loss. Transferring account balances directly to the retained earnings account increases the chances of missing some of the accounts, which can paint a completely different picture on profit and loss for a given period.
Likewise, an income summary account provides an accurate and reliable audit trail that shows a company’s net expenses as well as revenues for an accounting period.