Income Summary Account Definition, Example, Closing Entries

(IAS 1.99) If an entity categorises by function, then additional information on the nature of expenses, at least, – depreciation, amortisation and employee benefits expense – must be disclosed. (IAS 1.104) The major exclusive of costs of goods sold, are classified as operating expenses.

The balance sheet’s assets, liabilities, and owner’s equity accounts, however, are not closed. These permanent accounts and their ending balances act as the beginning balances for the next accounting period. Expenses recognised in the income statement should be analysed either by nature (raw materials, transport costs, staffing costs, depreciation, employee benefit etc.) or by function (cost of sales, selling, administrative, etc.).

IAS 18 — Revenue

They’re a little more complicated but can be useful to get a better picture of how core business activities are driving profits. Within an income statement, you’ll find all revenue and expense accounts for a set period.

The process involves moving data from a temporary account on the income statement. Income summary is a holding account used to aggregate all income accounts except for dividend expenses. Income summary is not reported on any financial statements because it is only used during the closing process, and at the end of the closing process the account balance income summary definition is zero. The income summary account resets at the beginning of every accounting period, whereas the purpose of the income statement is to show the financial performance during the period. Likewise, an income summary account provides an accurate and reliable audit trail that shows a company’s net expenses as well as revenues for an accounting period.

Income Summary vs Income Statement

However, real-world companies often operate on a global scale, have diversified business segments offering a mix of products and services, and frequently get involved in mergers, acquisitions, and strategic partnerships. This is done through a journal entry debiting all revenue accounts and crediting income summary. Income summary effectively collects NI for the period and distributes the amount to be retained into retained earnings. Balances from temporary accounts are shifted to the income summary account first to leave an audit trail for accountants to follow. As part of the closing entry process, the net income is moved into retained earnings on the balance sheet. The assumption is that all income from the company in one year is held onto for future use.

It is also possible that no income summary account will appear in the chart of accounts. If the resulting balance in the income summary account is a profit , then debit the income summary account for the amount of the profit and credit the retained earnings account to shift the profit into retained earnings . Conversely, if the resulting balance in the income summary account is a loss , then credit the income summary account for the amount of the loss and debit the retained earnings account to shift the loss into retained earnings. This is the second step to take in using the income summary account, after which the account should have a zero balance. The details in the income statement are transferred to the income summary account where the expenses are deducted from the revenues to determine if the business made a profit or a loss. Permanent accounts, also known as balance sheet accounts, are the accounts that report on activities related to one or more future accounting periods – such as cash.