Definition of Income Summary Account
The Income Summary account is a temporary account used with closing entries in a manual accounting system. (Computerized accounting systems may close the temporary accounts without recording the amounts in an Income Summary account.)
The Income Summary is very temporary since it has a zero balance throughout the year until the year-end closing entries are made. Next, the balance resulting from the closing entries will be moved to Retained Earnings (if a corporation) or the owner’s capital account (if a sole proprietorship).
Example of Income Summary Account
In a manual accounting system, the closing entries will result in the following amounts in Income Summary:
- A credit amount for the total amount of the general ledger income statement accounts that had credit balances
- A debit amount for the total amount of the general ledger income statement accounts that had debit balances
Next, if the Income Summary has a credit balance, the amount is the company’s net income. The Income Summary will be closed with a debit for that amount and a credit to Retained Earnings or the owner’s capital account.
If the Income Summary has a debit balance, the amount is the company’s net loss. The Income Summary will be closed with a credit for that amount and a debit to Retained Earnings or the owner’s capital account.
