Here are brief explain of Income Summary Journal Entry. Income summary account is a temporary account used during the closing process of accounting to summarize revenues and expenses before they are transferred to the retained earnings account. At the end of the accounting period, all revenue and expense accounts are closed to the income summary account, and then the net balance (profit or loss) is transferred to retained earnings.
Example of Income Summary Journal Entry
- Closing Revenue Accounts
Let’s assume a company has total revenues of ₹5,00,000 for the year ending 31-03-2024.
Journal Entry Format:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-03-2024 | Revenue | 5,00,000 | Closing revenue accounts | |
| 31-03-2024 | To Income Summary | 5,00,000 | Transfer to income summary |
Explanation:
- Revenue (Debit): This decreases the revenue accounts to zero.
- To Income Summary (Credit): This transfers the total revenues to the income summary account.
- Closing Expense Accounts
Let’s assume the total expenses for the year are ₹3,00,000.
Journal Entry Format:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-03-2024 | Income Summary | 3,00,000 | Closing expense accounts | |
| 31-03-2024 | To Expenses | 3,00,000 | Transfer to income summary |
Explanation:
- Income Summary (Debit): This decreases the income summary account by the total expenses.
- To Expenses (Credit): This decreases the expense accounts to zero.
- Transferring Net Income to Retained Earnings
Now, the income summary account has a net balance of ₹2,00,000 (₹5,00,000 – ₹3,00,000), which represents the net income for the year.
Journal Entry Format:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-03-2024 | Income Summary | 2,00,000 | Closing income summary | |
| 31-03-2024 | To Retained Earnings | 2,00,000 | Transfer to retained earnings |
Explanation:
- Income Summary (Debit): This decreases the income summary account to zero.
- To Retained Earnings (Credit): This increases the retained earnings account by the net income for the year.
Conclusion
The income summary account is essential for summarizing a company’s revenues and expenses at the end of an accounting period. Closing entries ensure that revenue and expense accounts start with a zero balance in the next accounting period, and the net income or loss is transferred to retained earnings, reflecting the company’s accumulated profits or losses.