How to Calculate Income Summary for Closing

Calculating the income summary for a month, quarter or year is surprisingly easy. You do 99% of the work when making out your income statement. Then, you transfer a summary of the statement into a temporary account. Income summary entries provide a paper trail when auditors go over your financial statements.

Tip

The income summary entries are the total expenses and total income from your company's income statement. To calculate the income summary, simply add them together. Then, you transfer the total to the balance sheet and close the account.

The information in your income summary entries comes from the income statement. This is the financial statement that shows your profit or loss for a given period, such as April or the third quarter of the year or the entire year.

• At the top of the income statement is your sales revenue, from which you subtract the cost of goods sold. This is what the inventory you sold in the accounting period cost to purchase or manufacture. Subtracting cost of goods sold

  leaves you with your gross profit.
  
  Below gross profit you list all your expenses. Subtracting total expenses gives you earnings before tax or net profits.
  
  Subtracting taxes gives you net earnings.
  
  * You may have added sections — for example, dealing with investment income or losses.

Once you've made out the income statement, drawing up the income summary is simple enough.

Unlike some bookkeeping accounts, the income summary doesn't track or record any new information. The financial data in the income summary is all on the income statement. However, there are a couple of significant differences between them.

The big difference is that the March income statement, for example, is a permanent account. The March income summary is a temporary account: you create it, make a couple of income statement entries, transfer the resulting amounts and close the account.

This may seem like pointless extra work, as you can transfer the data directly from the income statement to the balance sheet. Transferring revenue and expenses to the income summary creates a paper trail. That makes it much easier for auditors to later confirm that amounts in the balance sheet and elsewhere are legitimate.

Suppose when you make out your income statement for March, you have $300,000 in gross income and $225,000 in expenses for the month. Your net income before taxes is $75,000. From this information, you make your income summary entries:

• You debit revenue for $300,000 and credit that money to the income summary account.
  
  
• You credit expenses for $225,000 and debit the income summary account for an equal quantity.
  
  
• This leaves you with $75,000 net profits in the income summary account. Debit the income summary for that amount and credit the retained earnings account on the balance sheet.
  
  
• Close the income summary account. When you make out April's financial statements, you'll create a new income summary.

If you use accounting software, your computer will handle this automatically. It's so automatic that you may not even see the income summary in the chart of accounts. This is a listing of accounts in your ledgers, which accounting programs use to aggregate information.

In a corporation, the amount in the income summary jumps to the balance sheet. It increases — or in the case of a net loss, decreases — retained earnings. However, that's not the case for other business structures.

In a partnership, for example, you'd transfer $75,000 in net profits into the partners' capital accounts. This represents their ownership stake in the business, which increased by $75,000 in the income summary example. If there were three partners sharing equally, each of their accounts would grow by $25,000.

The income summary is an accounting tool. When you transfer income and expenses to the income summary, you close out the relevant revenue and expense accounts for the period. That lets you start fresh with your accounts for the next period.