Definition
The income summary is a temporary account used only during year-end closing. Revenue and expense balances are closed into it, so its balance equals the year's profit or loss. That balance is then transferred to retained earnings, leaving the income summary at zero until the next close.
How it works
The account adds a useful checkpoint. After revenue and expenses are closed into it, its balance must equal the net profit on the income statement. If it does not, an account was missed or classified wrongly.
A credit balance in the income summary means profit; a debit balance means loss. The final closing entry debits or credits it for that amount against retained earnings.
Never post ordinary transactions to the income summary. It should show activity on only one day each year: the closing date.
Example: a loss year
Revenue 80,000 and expenses 86,000 leave a debit balance of 6,000 in the income summary, which reduces retained earnings.
| Account | Debit | Credit |
|---|---|---|
| Retained earnings | 6,000 | |
| Income summary | 6,000 |