Closing Income Summary Journal Entry

The income summary account is then closed to the retained earnings account.

Closing income summary journal entry. Temporary accounts can either be closed directly to the retained earnings account or to an intermediate account called the income summary account. Let s look at the t account for income summary. Expense accounts have debit balances. Without proper journal entries companies financial statements would be inaccurate and a complete mess.

Both ways have their advantages. To close the expense accounts for bob we need to debit the income summary account and credit all the relevant individual expenses accounts such as utilities expense wages expense depreciation expense etc. Closing entry 2 for bob. Using income summary in closing entries.

This will ensure that the balances of those expenses account are transferred to the income summary account. Closing an expense account means transferring its debit balance to the income summary account the journal entry to close an expense account therefore consists of a credit to the expense account in an amount equal to its debit balance with an offsetting debit to the income summary. A closing entry is a journal entry journal entries guide journal entries are the building blocks of accounting from reporting to auditing journal entries which consist of debits and credits. What is a closing entry.

The income summary balance agrees to the net income reported on the income statement. That is made at the end of an accounting period fiscal year fy a. If income summary account has a credit balance it means the business has earned a profit during the period which causes an increase in retained earnings. 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.

Closing the revenue accounts transferring the credit balances in the revenue accounts to a clearing account called income summary. 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. Figure 3 7 closing revenue and expense accounts when the income summary is closed to retained earnings in the third closing entry the 1 932 credit balance in the income summary account is transferred into retained earnings as shown in figure 3 8. Here is the journal entry to close the expense accounts.

Closing temporary accounts to the company s income summary account allows the company to begin the next accounting cycle with a zero balance in the revenue and expense accounts. After these two entries the revenue and expense accounts have zero balances. Closing for expense accounts. After the expense and revenue accounts are closed the company must make an entry in the general journal to close the income summary account.

The debit to income summary should agree to total expenses on the income statement. Therefore the income summary account is closed by debiting income summary account and crediting retained earnings.