The income summary account is a temporary account that is used in the closing process to calculate the net income or net loss for an accounting period. It is a suspense account that is used to accumulate the balances of all revenue and expense accounts in order to determine the net income or net loss for the period.

At the end of an accounting period, the balance in the income summary account represents the difference between total revenues and total expenses for the period. If the balance is positive, it represents net income, and if the balance is negative, it represents a net loss.

Here is an example of the use of the income summary account in the closing process:

At the end of the year, the balance in the revenue account is $50,000 and the balance in the expenses account is $30,000. To close these accounts, the following entries are made:

Debit Credit

Revenue account $50,000

Income Summary account $50,000

Debit Credit

Expenses account $30,000

Income Summary account $30,000

The net effect of these entries is to transfer the balances of the revenue and expenses accounts to the income summary account, which now has a balance of $20,000. This represents the net income for the period.

To close the income summary account, the following entry is made:

Debit Credit

Income Summary account $20,000

Retained Earnings account $20,000

This entry transfers the net income from the income summary account to the retained earnings account, which is a permanent equity account. The balance in the income summary account is then reset to zero, ready to receive new transactions in the next period.

It’s important to note that the income summary account is only used in the closing process and is not used for any other purpose. It is not a formal financial statement and is not provided to external stakeholders.