Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 4 - Accrual Accounting Concepts - Questions: 28

Answer

Income summary is a temporary account used in closing revenue and expenses accounts. At the and of the accounting period companies transfer all the revenue accounts and expenses accounts (temporary accounts) to the stockholder's account i.e. retained earnings account, through passing the closing entries.

Work Step by Step

Since by transferring all the accounts to retained earnings account would result in excessive details in retained earnings account, therefore the companies close the revenue and expense account to another temporary account called income summary, and the only the resulting net income or net loss is transferred to retained earnings account.
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