The T-account summary for Printing Plus after closing entries are journalized is presented in Figure 1.31. Let’s explore each entry in more detail using Printing Plus’s information from Analyzing and Recording Transactions and The Adjustment https://www.vizaca.com/bookkeeping-for-startups-financial-planning-to-push-your-business/ Process as our example. The Printing Plus adjusted trial balance for January 31, 2019, is presented in the following Figure 1.28. It is the end of the year, December 31, 2018, and you are reviewing your financials for the entire year.
- Notice that the Income Summary account is now zero and is ready for use in the next period.
- And without closing expense accounts, you couldn’t compare your business expenses from period to period.
- You need to create closing journal entries by debiting and crediting the right accounts.
- Each of these accounts must be zeroed out so that on the first day of the year, we can start tracking these balances for the new fiscal year.
- The balance in the Income Summary account equals the net income or loss for the period.
- The income summary account is an intermediary between revenues and expenses, and the Retained Earnings account.
Starting with zero balances in the temporary accounts each year makes it easier to track revenues, expenses, and withdrawals and to compare them from one year to the next. There are four closing entries, which transfer all temporary account balances to the owner’s capital account. While the income statement is used for recording expenses and revenues for a given accounting period, the income summary account holds closing records of revenues and expenses. The income summary is, therefore, a temporary account as it holds a zero balance throughout the year until the year ending closing entries are made. Accountants transfer its closing entries into the Retained Earnings account consequently resulting in its closing. It helps in maintaining the overall audit trail of revenues earned by the business and the expenses incurred by the business.
Four Steps to Complete Closing Entries
We do not need to show accounts with zero balances on the trial balances. Notice that revenues, expenses, dividends, and income summary all have zero balances. The post-closing T-accounts will be transferred to the post-closing trial balance, which is step 9 in the accounting cycle. It is a temporary, intermediate account, which means that the revenue and expenses balance is transferred to permanent accounts at the end of the accounting period through closing entries.
An income summary report may include the Financial year, Basis, Account, Category, or Customer. The first is to close all of the temporary accounts in order to start with zero balances for the next year. The second is to update the balance in Retained Earnings to agree to the Statement of Retained Earnings. Learn the definition of both temporary accounts and permanent accounts.
Example of the Income Summary Account
However, the cash balances, as well as the other balance sheet accounts, are carried over from the end of a current period to the beginning of the next period. Once the temporary accounts are closed to the income summary account, the balances are held there until final closing entries are made. Once all the temporary accounts are closed, the balance in the income summary account should be equal to the net income of the company for the year.
This balance is then transferred to the retained earnings account in a journal entry like this. This final income summary balance is then transferred to the retained earnings (for corporations) or capital accounts (for partnerships) at the end of the period after the income statement is prepared. This income balance is then reported in the owner’s equity section of the balance sheet.