How to Close an Income Summary With a Net Loss

Then the income summary account is zeroed out and transfers its balance to the retained earnings (for corporations) or capital accounts (for partnerships). This transfers the income retained earnings balance sheet or loss from an income statement account to a balance sheet account. This is the only time that the income summary account is used.

Closing Entry For Net Income

By closing revenue, expense and dividend/distribution accounts, we get the desired balance in Retained Earnings. We need to complete entries to update the balance in Retained Earnings so it reflects the balance on the Statement of Retained Earnings. We know the change in the balance includes net income and dividends.

Income summary for expenses

On the other hand, if the company makes a net loss, it can make the income summary journal entry by debiting retained earnings account and crediting the income summary account instead. 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. The company can make the income summary journal entry for the expenses by debiting the income summary account and crediting the expense account. After Paul’s Guitar Shop prepares its closing entries, the income summary account has a balance equal to its net income for the year.

• A company with $10,000 in the revenue account must credit income summary for $10,000 to close the revenue account.
• Now for this step, we need to get the balance of the Income Summary account.
• Remember that the periodicity principle states that financial statements should cover a defined period of time, generally one year.
• Debit the ​$7,000​, transfer the total to your Retained Earnings or Owner’s Capital account, and then close Income Summary.
• Draft the day and month when the company closes the income summary account.

Example of Closing Entries

For the rest of the year, the income summary account maintains a zero balance. After preparing the closing entries above, Service Revenue will now be zero. The expense accounts and withdrawal account will now also be zero. Temporary accounts include revenue, expenses and dividends.

AccountingTools

• The first is to close all of the temporary accounts in order to start with zero balances for the next year.
• This entry takes the income summary account balance off the company’s books.
• This balance is then transferred to the retained earnings account in a journal entry like this.
• We need to complete entries to update the balance in Retained Earnings so it reflects the balance on the Statement of Retained Earnings.
• Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.

For example, suppose you run a trucking company with two dozen different customers. At the end of the quarter, you take the revenue you received from all your customers, add it up and find you have ​$45,000​ in gross income. Your expenses, including fuel, salaries and repairs, add up to ​$38,000.​ You record that in a temporary expense account.

Financial Accounting

Write the date when the company closes the revenue account. Communicate the day and month of the closing entry in the general journal. Since the income summary account is only a transitional account, it is also acceptable to close directly to the retained earnings account and bypass the income income summary account summary account entirely. However, some corporations use a temporary clearing account for dividends declared (let’s use “Dividends”).

How to Adjust the Balance on a Profit and Loss Report

• At the end of the quarter, you take the revenue you received from all your customers, add it up and find you have ​$45,000​ in gross income.
• The company only uses this account at the end of the period to clear all accounts in the income statement.
• What did we do with net income when preparing the financial statements?
• After these two entries, the revenue and expense accounts have zero balances.
• Distributions has a debit balance so we credit the account to close it.
• For partnerships, each partners’ capital account will be credited based on the agreement of the partnership (for example, 50% to Partner A, 30% to B, and 20% to C).

Here are MacroAuto’s accounting records simplified, using positive https://www.bookstime.com/ numbers for increases and negative numbers for decreases instead of debits and credits in order to save room and to get a higher-level view. We now close the Distributions account to Retained Earnings. Distributions has a debit balance so we credit the account to close it. Our debit, reducing the balance in the account, is Retained Earnings. Christopher Carter loves writing business, health and sports articles.