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You might be asking yourself, “is the Income Summary account even necessary? ” Could we just close out revenues and expenses directly into retained earnings and not have this extra temporary account? We could do this, but by having the Income Summary account, you get a balance for net income a second time. This gives you the balance to compare to the income statement, and allows you to double check that all income statement accounts are closed and have correct amounts. If you put the revenues and expenses directly into retained earnings, you will not see that check figure. No matter which way you choose to close, the same final balance is in retained earnings.
- Next, transfer the $2,500 in your expense account to your income summary account.
- Whatever accounting period you select, make sure to be consistent and not jump between frequencies.
- Your car, electronics, and furniture did not suddenly lose all their value, and unfortunately, you still have outstanding debt.
- The post-closing T-accounts will be transferred to the post-closing trial balance, which is step 9 in the accounting cycle.
- We will debit the revenue accounts and credit the Income Summary account.
- You need to use closing entries to reduce the value of your temporary accounts to zero.
- Since the income summary account is only a transitional account, it is also acceptable to close directly to the retained earnings account and bypass the income summary account entirely.
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How is the Income Summary account related to the year-end closing process?
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Corporations will close the income summary account to the retained earnings account. First, transfer the $5,000 in your revenue account to your income summary account. After the accounts are closed, the income summary is then transferred to the capital account of the owner and then closed.
Preparing Closing Entries
Are the value of your assets and liabilities now zero because of the start of a new year? Your car, electronics, and furniture did not suddenly lose all their value, and unfortunately, you still have outstanding debt. Therefore, these accounts still have a balance in the new year, because they are not closed, and the balances are carried forward from December 31 to January 1 to start the new annual accounting period.
The balance in Income Summary is the same figure as what is reported on Printing Plus’s Income Statement. To close the account, we need to debit the income summary account and credit all the relevant individual expenses accounts such as utilities expense, wages expense depreciation expense, etc. These are general account ledgers that show balances recorded over multiple periods. These will usually include all balance sheet items like assets, liabilities and equity accounts. Therefore, all those accounts are included for which current balances must be used in the next financial reporting period and for which accounts cannot be closed out. In a partnership, separate entries are made to close each partner’s drawing account to his or her own capital account.
Purpose of Income Summary
The credit to income summary should equal the total revenue from the income statement. Transferring funds from temporary to permanent accounts also updates your small business retained earnings account. You can report retained earnings either on your balance sheet or income statement. Without transferring funds, your financial statements will be inaccurate.
Since the income summary account is only a transitional account, it is also acceptable to close directly to the retained earnings account and bypass the income summary account entirely. Once the closing entries have been posted, the trial balance calculation is performed to help detect any errors that may have occurred in the closing process. The fourth entry requires Dividends to close to the Retained Earnings account. Remember from your past studies that dividends are not expenses, such as salaries paid to your employees or staff. Instead, declaring and paying dividends is a method utilized by corporations to return part of the profits generated by the company to the owners of the company—in this case, its shareholders. Companies are required to close their books at the end of each fiscal year so that they can prepare their annual financial statements and tax returns.