An income summary account is a temporary accounting document used to balance all accounts at the end of an accounting period by transferring money from income and expense accounts to the retained earnings account, indicating whether the company made a profit or loss.
An income summary account is a temporary accounting document used specifically at the end of an accounting period to balance all accounts. It is also useful because it transfers all the money from the income and expense accounts to the retained earnings account. By doing this, the income summary account essentially resets the books for the start of a new accounting period. This is also useful because it can provide information on whether the company in question made a profit or a loss during the time period studied.
Business accounting requires that all accounts be balanced so that no amount of money is lost when the books are consulted. This requires credit and debit accounts to be guaranteed based on money coming in or going out of the business. As each accounting period ends, the money in the income and expense accounts needs to be reconfigured so that it appears on the balance sheet. One way to do this is to use the income summary account.
The first step in composing an income summary account is to remove everything from the income and earnings statements. All income earned during a specified period is credited to this temporary account by uploading the income statement and crediting the income summary. Instead, all expenses found in the expense account must also be moved. This is done by crediting the expense statement for the full amount and debiting the income summary for that same amount.
Once this is complete, you need to move everything from the income summary account to the retained earnings account, which is found on the company’s balance sheet. The first step is to find the difference between the credits and debits on the income statement. If there is more credit, it means that there is a profit. More debits indicate that there was a loss sustained by the company in that period.
Finally, this amount, either a profit or a loss, is entered into the retained earnings account. A loss means that the income summary account would be credited for that lost amount and retained earnings would be debited for the same amount. If a profit was made, the income statement would be debited and retained earnings would be credited. This way, all the accounts are balanced and the income and expense accounts are offset so that new entries are made.
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