When doing closing entries, try to remember why you are doing them and connect them to the financial statements. To update the balance in Retained Earnings, we must transfer net income and dividends/distributions to the account. By closing revenue, expense and dividend/distribution accounts, we get the desired balance in Retained Earnings. Likewise, a Loan account and other liability accounts normally maintain a negative balance.

• The income summary is a summarization and compilation of temporary accounts of the revenues and expenses.
• Suppose the account shows a net loss of ​$5,000.​ You close the account by crediting Income Summary with ​$5,000​ and debiting Retained Earnings for the same amount.
• Closing entries are completed at the end of each accounting period after your adjusted trial balance has been run.
• They make it easier for businesses to transition revenues and expenses into the balance sheet.
• To increase the value of an account with normal balance of debit, one would likewise debit the account.

The purpose of the closing entry is to reset the temporaryaccount balancesto zero on the general ledger, the record-keeping system for a company’s financial data. Temporary accounts are zeroed out at the end of the accounting period and start with a zero balance in the next period. The balance of permanent accounts are not closed but are rather carried forward in the next accounting period. The ending balance of the current period becomes the opening balance in the next.

What is the Income Summary Account?

Each of these accounts must be zeroed out so that on the first day of the year, we can start tracking these balances for the new fiscal year. Remember that the periodicity principle states that financial statements should cover a defined period of time, generally one year. If we do not close out the balances in the revenue and expense accounts, these accounts would continue to contain the revenue and expense balances from previous years and would violate the periodicity principle.

• If the balances in the expense accounts are debits, how do you bring the balances to zero?
• Its use as an organizational skill is underlined by how it summarizes all the necessary ledger balances in one value instead of a single account balance.
• Likewise, after transferring the balances of all accounts in the income statement to the balance sheet, the income summary balance will become zero again.
• Thus, the income summary account essentially clears out the ledgers to start a new reporting period in accounting.
• Once all of the required entries have been made, you can run your post-closing trial balance, as well as other reports such as an income statement or statement of retained earnings.

Closing entry to account for draws taken for the month, for sole proprietors and partnerships. WSO provides its members with an Accounting Foundations course to master the necessary accounting skills. While this example highlights exactly what preparing the account looks like, there are times when companies never actually have to go through the process of producing it. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.

Introduction to Normal Balances

The income summary account is an intermediate account that is used to close the books. It is used when a company chooses to transfer the balance of individual revenue and expense accounts directly to retained earnings. The income summary account is also used when a company chooses to close the books using an income statement. Once the temporary accounts have all been closed and balances have been transferred to the income summary account, the income summary account balance is transferred to the capital account or retained earnings. The credit balance of the revenue account is transferred by debiting the revenue account and crediting the income summary account.

Definition of Income Summary Account

It is also useful in the sense that it can provide information about whether the firm made a profit or loss over the time period. This process resets both the income and expense accounts to zero, preparing them for the next accounting period. Transferring the expense account to the account is similar to the revenue account process. However, rather than credit the expense balance to transfer it, businesses understanding your chart of accounts must debit it, given that expenses are already credited. Because the balances in the temporary accounts are transferred out of their respective accounts at the end of the accounting year, each temporary account will have a zero balance when the next accounting year begins. This means that the new accounting year starts with no revenue amounts, no expense amounts, and no amount in the drawing account.

Step 1: Closing the revenue account

Companies produce three major financial statements that reflect their business activities and profitability for each accounting period. These statements are the balance sheet, income statement, and statement of cash flows. The cash flow statement shows how well a company manages cash to fund operations and any expansion efforts.

Normal Balances

The account of income summary is used for closing-entry recording at the end of an accounting period. This final income summary balance is then transferred to the retained earnings or capital accounts at the end of the period after the income statement is prepared. This income balance is then reported in the owner’s equity section of the balance sheet. The first entry requires revenue accounts close to the Income Summary account. To get a zero balance in a revenue account, the entry will show a debit to revenues and a credit to Income Summary. Printing Plus has $140 of interest revenue and $10,100 of service revenue, each with a credit balance on the adjusted trial balance.

A normal balance is the side of the T-account where the balance is normally found. When an amount is accounted for on its normal balance side, it increases that account. The statement of retained earnings shows the period-ending retained earnings after the closing entries have been posted.