Now for this step, we need to get the balance of the Income Summary account. In step 1, we credited it for $9,850 and debited it in step 2 for $8,790. Prepare the closing entries for Frasker Corp. using the adjustedtrial balance provided. Printing Plus has a $4,665 credit balance in its Income Summaryaccount before closing, so it will debit Income Summary and creditRetained Earnings. And just like any other trial balance, total debits and total credits should be equal.

Step 3: Close Income Summary to the appropriate capital account

• In contrast, when there is a loss incurred, the debit side has more value than the credit side of the account.
• Just like in step 1, we will use Income Summary as the offset account but this time we will debit income summary.
• The balance in dividends, revenues and expenses would all be zero leaving only the permanent accounts for a post closing trial balance.

Printing Plus has $100 ofdividends with a debit balance on the adjusted trial balance. Theclosing entry will credit Dividends and debit RetainedEarnings. Thebalance in the Income Summary account equals the net income or lossfor the period. This balance is then transferred to the RetainedEarnings account.

Despite the various advantages listed above, there are a few factors that act as hassles while maintaining an income summary account. Let us understand the disadvantages through the discussion below. Let us understand the concept of an income summary account with the help of a couple of examples. These examples would give us an in-depth idea about the concept. For partnerships, each partners’ capital account will be credited based on the agreement of the partnership (for example, 50% to Partner A, 30% to B, and 20% to C). For corporations, Income Summary is closed entirely to “Retained Earnings”.

Its purpose is to test the equality between debits and credits after the recording phase. Dividends are close to the income summary and retained earnings. Therefore, the retained earnings account shows the earnings that are kept, net income fewer dividends in the business.

• After preparing the closing entries above, Service Revenue will now be zero.
• 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.
• For our purposes, assume that we are closing the books at theend of each month unless otherwise noted.
• The first entrycloses revenue accounts to the Income Summary account.

Step 3: Close Income Summary to Retained Earnings (Net Income)

Closing the income summary account is done after all income sources are accounted as retained earnings of the organization. But before that entry is passed, there are a few steps to the process. Let us discuss the steps through the explanation below. When dividends are declared by corporations, they are usually recorded by debiting Dividends Payable and crediting Retained Earnings. Note that by doing this, it is already deducted from Retained Earnings (a capital account), hence will not require a closing entry.

Post-Closing Trial Balance Example

In other words, the income and expense accounts are “restarted”. To further clarify this concept, balances are closed to assureall revenues and expenses are recorded in the proper period andthen start over the following period. In the first and second closing entries, the balances of Service Revenue and the various expense accounts were actually transferred to Income Summary, which is a temporary account. The Income Summary account would have a credit balance of 1,060 (9,850 credit in the first entry and 8,790 debit in the second).

The third entry requires Income Summary to close to the RetainedEarnings account. To get a zero balance in the Income Summaryaccount, there are guidelines to consider. However, if the company also wanted to keep year-to-dateinformation from month to month, a separate set of records could bekept as the company progresses through the remaining months in theyear.

This balance is then transferred to the retained earnings account in a journal entry like this. Then the income summary account is zeroed out and transfers its balance to the retained earnings (for corporations) or capital accounts (for partnerships). This transfers the income or loss from an income statement account to a balance sheet account. This is the only time that the income summary account is used. For the rest of the year, the income summary account maintains a zero balance. The purpose of closing entries is to prepare the temporary accounts for the next accounting period.

Company

The income summary account is a temporary account used to store income statement account balances, revenue and expense accounts, during the closing entry step of the accounting cycle. In other words, the income summary account is simply a placeholder for account balances at the end of the accounting period while closing entries are being made. 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 earnings or capital account in the balance sheet, and the income summary will be closed. 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. Once the entries are finalized, the income summary closing entries are documented and transferred to the retained earnings of an organization or individual.

After passing this entry, the all-expense accounts balance will become zero. This means thatit is not an asset, liability, stockholders’ equity, revenue, orexpense account. Temporary (nominal) accounts are accounts thatare closed at the end of each accounting period, and include incomestatement, dividends, and income summary accounts.

An income summary account summarizes all the operating and non-operating business activities on one page and concludes the company’s financial performance. In a sole proprietorship, a drawing account is maintained to record all withdrawals made by the owner. In a partnership, a drawing account is maintained for each partner. All drawing accounts after the second closing entry is posted, income summary is equal to are closed to the respective capital accounts at the end of the accounting period. Take note that closing entries are prepared only for temporary accounts. Our discussion here begins with journalizing and posting theclosing entries (Figure5.2).

Four Steps in Preparing Closing Entries

Mr. Gray’s withdrawals are recorded in Mr. Gray, Drawing. To close the drawing account to the capital account, we credit the drawing account and debit the capital account. This is closed by doing the opposite – debit the capital account (decreasing the capital balance) and credit Income Summary. Let us understand the advantages of passing income summary closing entries for an organization or an individual through the points below.

If both summarizeyour income in the same period, then they must be equal. Notice that the balances in interest revenue and service revenueare now zero and are ready to accumulate revenues in the nextperiod. The Income Summary account has a credit balance of $10,240(the revenue sum). Companies are required to close their books at the end of eachfiscal year so that they can prepare their annual financialstatements and tax returns. However, most companies prepare monthlyfinancial statements and close their books annually, so they have aclear picture of company performance during the year, and giveusers timely information to make decisions. After posting the above entries, all the nominal accounts would zero-out, hence the term “closing entries”.