Which account should be closed to income Summary at the end of the fiscal year?

Income Summary Definition

An income summary is a temporary account in which all the revenue and expenses accounts’ closing entries are netted at the accounting period’s end. The resulting balance is considered a profit or loss. If the net balance of income summary is a credit balance, it means the company has made a profit for that year, or if the net balance is a debit balance, it means the company has made a loss for that year.

It summarizes income and expenses arising from operating and nonoperating activities. Therefore, it is also called a revenue and expense summary.

How to Prepare Income Summary?

Which account should be closed to income Summary at the end of the fiscal year?

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Source: Income Summary (wallstreetmojo.com)

Step 1 – Closing of Revenue Accounts

Revenue accounts always have credit balances. At the end of the accounting periodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more, all the revenue accounts will be closed by transferring the credit balanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance. read more to the income summary. It will be done by debiting the revenue accounts and crediting the income summary account. After passing this entry, all revenue accountsRevenue accounts are those that report the business's income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it's common examples.read morewill become zero.

Step 2 – Closing of Expense Accounts

Expenses accounts always have debit balances. At the end of the accounting period, all fees will be closed by transferring the debitDebit represents either an increase in a company’s expenses or a decline in its revenue. read more to the income summary by crediting the expenses account and debiting the income summary account. After passing this entry, theall-expense accountsExpense accounting is the accounting of business costs incurred to generate revenue. Accounting is done against the vouchers created at the time the expenses are incurred.read more balance will become zero.

Step 3 – Finalizing the Income Summary Account

Now, these accounts have all the revenue accounts balance in the credit side column as the total Income of the organization and the expense account balance in the debit side column as the total expenditure of the organization. If the credit balance is more than the debit balance, it indicates the profit; if the debit balance is more than the credit balance, it shows the loss. In the last credit or debit balance, whatever may become, it will be transferred into retained earningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more or capital accountThe capital account refers to the general ledger that records the transactions related to owners funds, i.e. their contributions earnings earned by the business till date after reduction of any distributions such as dividends. It is reported in the balance sheet under the equity side as “shareholders’ equity.”read more in the balance sheet, and the income summary will be closed.

Example of Income Summary

The following is an example of an income summary:

XYZ Inc is preparing an income summary for the year ended December 31, 2018, and below are the revenue and expense account balances as of December 31, 2018.

The closing balance of revenue accounts are as below:

  • Sales – $80,000
  • Interest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read more –  $500
  • Miscellaneous Income – $240

The closing balance of expense accounts is as below:

  • Purchase –  $50,000
  • Rent Expenses  – $8,000
  • Salaries & Wages – $3,500
  • Printing & Stationery – $700
  • Advertisement Expenses – $500
  • Electricity Expenses  – $260

Now all the above accounts will be closed by transferring their balances into an income summary with the help of the below journal entry:

Which account should be closed to income Summary at the end of the fiscal year?
Which account should be closed to income Summary at the end of the fiscal year?

Balance of income and expenditure will be transferred to retained earnings by passing the below entry:

Which account should be closed to income Summary at the end of the fiscal year?

After passing the above journal entry of income, the summary account will be prepared as below:

Which account should be closed to income Summary at the end of the fiscal year?

Advantages

  • It gives the organization’s total revenue and expense information in one place.
  • It helps investors and shareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more analyze a company’s financial performance for a specific period to decide on future investments.
  • One can track the company’s performance easily by reviewing the income summary of past years to know whether it is making a profit regularly or not.
  • It also helps fill income tax returns because it gives all the necessary information in one place.
  • It is easily understandable because it has only two columns.
  • Income summary helps in budget vs. actual variance analysisVariance analysis is the process of identifying and analyzing the difference between the standard numbers that a company expects to accomplish and the actual numbers that they achieve, in order to help the firm analyze positive or negative consequences.read more.
  • It is easy to derive the cash profit by adding or deducting the accrual balances.

Disadvantages

  • It includes operating and non-operating revenue and expenses. Therefore, it does not give the correct financial picture of the organization.
  • It is prepared on an accrual basis like it records the total sales value, whether money has been received or not, whether expenses have been recorded on an accrual basis, and whether it has been paid or not. Therefore, there is a chance of misrepresentation.
  • An income summary of one year is not helpful for financial performance analysis. An investor must take at least ten years of summary to analyze financial performance. Therefore, it is time-consuming and sometimes challenging to get the ten-year summary of the organization, which is not listed.

Conclusion

An income summary is a summary of Income and expenses for a specific period, and the result of this summary is profit or loss. It is an essential tool for preparingFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more financial statementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. It works as a checkpoint and mitigates the errors in preparing financial statements by directly transferring the balance from revenue and expense accounts.

Instead of sending a single account balance, it summarizes all the ledger balances in one value. It transfers it to a balance sheet, which gives more meaningful output for investors, management, vendorsA vendor refers to an individual or an entity that sells products and services to businesses or consumers. It receives payments in exchange for making items available to end-users. They constitute an integral part of the supply chain management for providing raw materials to manufacturers and finished goods to customers.read more, and other stakeholdersA stakeholder in business refers to anyone, including a person, group, organization, government, or any other entity with a direct or indirect interest in its operations, actions, and outcomes.read more. It summarizes all the operating and non-operating business activities on one page and concludes the company’s financial performance.

This has been a guide to Income Summary and its definition. Here we discuss steps to prepare an income summary, examples, closing entries, advantages, and disadvantages. You can learn more from the following articles –

  • Income Stock
  • Ordinary Income
  • Debit Balance

Which accounts should be closed at the end of the fiscal year?

Temporary accounts include revenue, expenses, and dividends, and these accounts must be closed at the end of the accounting year.

What accounts are closed to income Summary at year end?

The temporary accounts get closed at the end of an accounting year. Temporary accounts include all of the income statement accounts (revenues, expenses, gains, losses), the sole proprietor's drawing account, the income summary account, and any other account that is used for keeping a tally of the current year amounts.

What accounts should be closed to income Summary?

Close the income statement accounts with debit balances (normally expense accounts) to the income summary account. After all revenue and expense accounts are closed, the income summary account's balance equals the company's net income or loss for the period.

What accounts should be closed to retained earnings at the end of the fiscal year?

All Revenue and Expense accounts will need to be closed into Retained Earnings.