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We know the change in the balance includes net income and dividends. Therefore, we need to transfer the balances in revenue, expenses and dividends (the temporary accounts) into Retained Earnings to update the balance. After Paul’s Guitar Shop prepares its closing entries, the income summary account has a balance equal to its net income for the year. This balance is then transferred to the retained earnings account in a journal entry like this. Likewise, shifting expenses out of the income statement requires one to credit all of the expense accounts for the total amount of expenses recorded in the period, and debit the income summary account. This is the first step to take in using the income summary account.
- As you will learn in Corporation Accounting, there are three components to the declaration and payment of dividends.
- Income Summary allows us to ensure that all revenue and expense accounts have been closed.
- This income balance is then reported in the owner’s equity section of the balance sheet.
- The balance in Income Summary is the same figure as what is reported on Printing Plus’s Income Statement.
- After this entry is made, all temporary accounts, including the income summary account, should have a zero balance.
- Therefore, we need to transfer the balances in revenue, expenses and dividends (the temporary accounts) into Retained Earnings to update the balance.
The first step in preparing it is to close all the revenue accounts. Closing entries play a significant role in producing the accounts as they move the temporary account balances to permanent accounts on the balance sheet. After this entry is made, all temporary accounts, including the income summary account, https://www.bookstime.com/articles/income-summary-account should have a zero balance. The income summary account is also known as the temporary income statement account. Temporary accounts are those that are closed at the end of an accounting cycle. However, mention any familiarity with financial statements since revenue is a key part of income statements.
Steps to prepare income summary
You must close each account; you cannot just do an entry to “expenses”. If the balances in the expense accounts are debits, how do you bring the balances to zero? The debit to income summary should agree to total expenses on the Income Statement. We need to complete entries to update the balance in Retained Earnings so it reflects the balance on the Statement of Retained Earnings.
It also helps the company keep thorough records of account balances affecting retained earnings. Revenue, expense, and dividend accounts affect retained earnings and are closed so they can accumulate new balances in the next period, which is an application of the time period assumption. 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. For the rest of the year, the income summary account maintains a zero balance.
Using Income Summary in Closing Entries
You will notice that we do not cover step 10, reversing entries. This is an optional step in the accounting cycle that you will learn about in future courses. The trial balance, after the closing entries are completed, is now ready for the new https://www.bookstime.com/ year to begin. Distributions has a debit balance so we credit the account to close it. Our debit, reducing the balance in the account, is Retained Earnings. If you have only done journal entries and adjusting journal entries, the answer is no.
