Summary Statement No 34

Balances from temporary accounts are shifted to the income summary account first to leave an audit trail for accountants to follow. As part of the closing entry process, the net income (NI) is moved into retained earnings on the balance sheet. The assumption is that all income from the company in one year is held onto for future use. Any funds that are not held onto incur an expense that reduces NI. One such expense that is determined at the end of the year is dividends.

Phase 3 governments are encouraged to report infrastructure retroactively, but may elect to report general infrastructure prospectively only. The financial managers of governments are knowledgeable about the transactions, events, and conditions that are reflected in the government’s financial report and of the fiscal policies that govern its operations. This analysis should provide users with the information they need to help them assess whether the government’s financial position has improved or deteriorated as a result of the year’s operations. The trial balance,  after the closing entries are completed, is now ready for the new year to begin. Horizontal analysis makes financial data and reporting consistent per generally accepted accounting principles (GAAP).

What Is the Purpose of Preparing an Income Summary and an Income Statement?

Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.

This income balance is then reported in the owner’s equity section of the balance sheet. There are three broad steps that are involved in using and preparation of income summary account. As the first step, the revenue accounts have to be closed, wherein such balances would reflect credit balance at the end of the financial period. The revenue accounts would be closed by giving the credit summary on to the income summary. A debit would be done to the revenue account, and the credit would be done to the income summary account.

Purpose of Income Summary

For this reason, these types of accounts are called temporary or nominal accounts. Assets, liabilities, and the owner’s capital account, in contrast, are called permanent or real accounts because their ending balance in one accounting period is always the starting balance in the subsequent accounting period. When an accountant closes an account, the account balance returns to zero. 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. It helps in maintaining the overall audit trail of revenues earned by the business and the expenses incurred by the business.

Governments that elect early implementation of this Statement for periods beginning before June 15, 2000, should also implement GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, at the same time. If a primary government chooses early implementation of this bookkeeping questions Statement, all of its component units also should implement this standard early to provide the financial information required for the government-wide financial statements. Income summary effectively collects NI for the period and distributes the amount to be retained into retained earnings.

Vertical Analysis

You might have heard people call this “closing the books.” Temporary accounts like income and expenses accounts keep track of transactions for a specific period and get closed or reset at the end of the period. This way each accounting period starts with a zero balance in all the temporary accounts, so revenues and expenses are only recorded for current years. The income summary account is basically a temporary statement that documents and summarizes the income and the expenses that the business has earned and incurred from the non-operating and operating activities for a given accounting period. There are generally two components of the income summary statement, namely the debit side and credit side. For the rest of the year, the income summary account maintains a zero balance.

An income summary report may include the Financial year, Basis, Account, Category, or Customer. After these entries, the balance in the income summary account should represent the net income or loss for the period. In this case, it’s a credit balance of $15,000 ($100,000 – $85,000), which represents the net income. After this entry is made, all temporary accounts, including the income summary account, should have a zero balance. Proprietary fund statements of revenues, expenses, and changes in fund net assets should distinguish between operating and nonoperating revenues and expenses. These statements should also report capital contributions, contributions to permanent and term endowments, special and extraordinary items, and transfers separately at the bottom of the statement to arrive at the all-inclusive change in fund net assets.