Income Summary
What is Income Summary?
Income summary is a clearing account used to clear out income statement accounts.
![is1](https://seeaccountingnow.online/wp-content/uploads/2021/11/is1.jpg)
How it Works
During an accounting period, you record income and expenses.
![is2](https://seeaccountingnow.online/wp-content/uploads/2021/11/is2.jpg)
At period-end, you take that information and prepare an income statement.
![is3](https://seeaccountingnow.online/wp-content/uploads/2021/11/is3.jpg)
Once complete, the income and expense accounts have done their job.
![is4](https://seeaccountingnow.online/wp-content/uploads/2021/11/is4.jpg)
Income & expense accounts are temporary accounts
![is5](https://seeaccountingnow.online/wp-content/uploads/2021/11/is5.jpg)
So they need to be cleared out.
![is6](https://seeaccountingnow.online/wp-content/uploads/2021/11/is6.jpg)
This will leave them empty – ready for next period.
![is7](https://seeaccountingnow.online/wp-content/uploads/2021/11/is7.jpg)
To do this, you use a clearing account known as income summary.
![is8](https://seeaccountingnow.online/wp-content/uploads/2021/11/is8.jpg)
When complete, this account will summarize the income & expense accounts.
![is9](https://seeaccountingnow.online/wp-content/uploads/2021/11/is9.jpg)
To prepare it, you begin by transferring the revenue account’s balance.
![is10](https://seeaccountingnow.online/wp-content/uploads/2021/11/is10.jpg)
As indicated on the diagram, income accounts lie on the system’s credit side.
![is11](https://seeaccountingnow.online/wp-content/uploads/2021/11/is11.jpg)
This means the revenue account has a credit balance
![is12](https://seeaccountingnow.online/wp-content/uploads/2021/11/is12.jpg)
So to transfer the balance, you debit the account
![is13](https://seeaccountingnow.online/wp-content/uploads/2021/11/is13.jpg)
Doing this brings the account’s balance to zero – thereby closing it.
![is14](https://seeaccountingnow.online/wp-content/uploads/2021/11/is14.jpg)
To complete the transfer, you credit income summary
![is15](https://seeaccountingnow.online/wp-content/uploads/2021/11/is15.jpg)
Next, you transfer expenses
![is16](https://seeaccountingnow.online/wp-content/uploads/2021/11/is16.jpg)
As indicated on the diagram, expense accounts lie on the system’s debit side.
![is17](https://seeaccountingnow.online/wp-content/uploads/2021/11/is17.jpg)
This means each expense account has a debit balance.
![is18](https://seeaccountingnow.online/wp-content/uploads/2021/11/is18.jpg)
So to transfer their balance, you credit each expense account.
![is19](https://seeaccountingnow.online/wp-content/uploads/2021/11/is19.jpg)
Doing this brings the expense account balances to zero, as well
![is20](https://seeaccountingnow.online/wp-content/uploads/2021/11/is20.jpg)
To complete the transfer, you debit income summary with total expenses
![is21](https://seeaccountingnow.online/wp-content/uploads/2021/11/is21.jpg)
Now, you can find income summary’s balance
![is22](https://seeaccountingnow.online/wp-content/uploads/2021/11/is22.jpg)
Once found, the balance should equal net income for the period.
![is23](https://seeaccountingnow.online/wp-content/uploads/2021/11/is23.jpg)
Income summary is also a temporary account and needs to be closed.
![is24](https://seeaccountingnow.online/wp-content/uploads/2021/11/is24.jpg)
To do this, you debit the account.
![is25](https://seeaccountingnow.online/wp-content/uploads/2021/11/is25.jpg)
Then transfer the balance to retained earnings.
![is26.1](https://seeaccountingnow.online/wp-content/uploads/2021/11/is26.1.jpg)
© R.J. Hickman 2020