How to Close an Income Summary Account Step-by-Step

An income summary account is a temporary holding place used at the end of an accounting period to consolidate all revenue and expense balances. Its primary purpose is to reset all temporary accounts to a zero balance, preparing financial records for the subsequent period. This process also transfers the period’s net income or loss into a permanent equity account.

Understanding the Income Summary Account

The income summary account is a temporary account that starts and ends each accounting period with a zero balance. It acts as a clearing account, summarizing all revenue and expense transactions for a defined period. This consolidation allows for the calculation of net income or net loss before transferring that figure to a permanent equity account.

For corporations, the net effect typically moves to the Retained Earnings account, while for sole proprietorships and partnerships, it transfers to the Owner’s Capital account. The income summary’s role is important after financial statements, such as the income statement, have been prepared.

Gathering Account Balances for Closure

Before closing the income summary account, identify the current balances of all temporary accounts. These include all revenue accounts, such as Sales Revenue or Service Revenue, and all expense accounts, like Rent Expense, Salaries Expense, or Utilities Expense. These figures are the direct input for subsequent closing entries.

These balances are sourced from the adjusted trial balance or directly from the general ledger. Accuracy is important, as errors will impact the final equity balance. This ensures closing entries correctly reflect the period’s financial activity.

Executing the Closing Entries

Closing entries begin by transferring all revenue account balances into the income summary. Each revenue account is debited for its current credit balance. Concurrently, the Income Summary account is credited for the total sum of all revenue accounts. For example, if a business had $50,000 in Sales Revenue and $10,000 in Service Revenue, Sales Revenue would be debited for $50,000, Service Revenue debited for $10,000, and Income Summary credited for $60,000.

Next, all expense account balances are transferred into the Income Summary account. This involves debiting the Income Summary account for the total sum of all expenses. Each individual expense account is credited for its current debit balance. For instance, if a business had $20,000 in Salaries Expense and $5,000 in Rent Expense, Income Summary would be debited for $25,000, while Salaries Expense would be credited for $20,000 and Rent Expense credited for $5,000.

After both revenues and expenses are closed, the Income Summary balance represents the net income or net loss. If it has a net credit balance, indicating net income, the Income Summary account is debited for this amount. The Retained Earnings account (or Owner’s Capital) is credited for the same amount. For example, if the Income Summary has a $35,000 credit balance, Income Summary would be debited for $35,000 and Retained Earnings credited for $35,000.

Conversely, if the Income Summary account has a net debit balance, this signifies a net loss. In this scenario, the Retained Earnings account (or Owner’s Capital) is debited for the net loss amount. The Income Summary account is then credited for the same amount. For instance, if a company experienced a net loss of $15,000, Retained Earnings would be debited for $15,000, and Income Summary would be credited for $15,000.

Verifying the Closure

After all closing entries have been posted to the general ledger, verify their accuracy. This is primarily accomplished by preparing a post-closing trial balance. This trial balance lists all general ledger accounts and their balances after the closing process.

A correctly prepared post-closing trial balance will show that all temporary accounts now have a zero balance. Only permanent accounts, such as assets, liabilities, and equity accounts (like Retained Earnings or Owner’s Capital), will carry non-zero balances. This final check confirms that the books are balanced and prepared for a new accounting period.