Income Summary Account
Income summary account is a temporary account and is used to transfer out balances of all income and expenses accounts. As it is a temporary account, its balance is also transferred into retained earning account.
As we have already discussed in closing entries post, the items of all revenue and expenses are transferred to the income summary account one by one. The reason of doing so is to prepare the individual accounts for the next accounting period. All revenue accounts are debiting and all expenses accounts are credited and their respective figures are credited and debited into the income summary account respectively.
After doing so, we calculate the income summary account debit and credit side. If the credit side is greater than the debit side, it means that it is the profit or net income. We also need to close this balance as well by transferring it into retained earning account as follows:
Income Summary Journal Entry
| Debit | Credit | |||
|
Income Summary |
xxxxx |
|||
|
Retained Earning |
xxxxxx |
If the debit side of the income summary account is greater than the credit side total, it means that the company is incurring losses. We need to pass on the following entry to close the income summary account as well:
|
Debit |
Credit |
|||
|
Retained Earning |
xxxxx |
|||
|
Income Summary |
xxxxxx |
Example
ABC & Co has total revenue for the year $60,000. The following are the expenses accounts:
Cost of Goods Sold $12,000
Rent Expense $4,000
Selling Expenses $5,000
Admin Expenses $7,000
Prepare income summary account and close the income summary account.
Solution
|
Income Summary Account |
|||
|
COGS |
12,000 |
Revenue |
60,000 |
|
Rent Exp |
4,000 |
||
|
Selling Exp |
5,000 |
||
|
Admin Exp |
7,000 |
||
|
Retained Earning |
32,000 |
||
|
(Bal Figure) |
|||
|
60,000 |
60,000 |
||
Entry would be as follows:
|
Debit |
Credit |
|||
|
Income Summary |
32,000 |
|||
|
Retained Earning |
32,000 |
|||
Example
Dynasty Pvt Ltd has annual revenue of $1000,000. The gross profit margin is calculated at 20{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} of the net revenue. The other expenses as percentage of revenue are as under:
Entertainment expenses 10 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}
Utility Expenses 20 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}
Payroll Expenses 15 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}
Depreciation expenses 5 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}
Rent expenses 10 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}
Required:
1. Calculate gross profit, cost of sale.
2. Prepare income summary account and pass journal entry to close the income summary account.
Solution
As the gross profit is based over revenue, we need to work out gross profit figure using the following equation:
Sales revenue = Cost of sales + gross profit
100 = cost of sales + 20
Now, in order to calculate gross profit figure, we need to divide annual revenue of $1,000,000 by 100 and multiply by 20 as follows:
Gross Profit = 1,000,000 / 100 * 20 = $200,000
Now, we can also cost of sales by deducting the gross profit from annual revenue as follows:
Cost of sales = annual revenue – gross profit = 1,000,000 – 200,000
Cost of sales = $800,000
Now, it is the time to work out expenses figures by multiplying with {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}.
Entertainment expenses 10 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} = 10 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} x 1,000,000 = 100,000
Utility Expenses 20 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} = 20 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} x 1,000,000 = 200,000
Payroll Expenses 15 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} = 15{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} x 1,000,000 = 150,000
Depreciation expenses 5 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} = 5 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} x 1,000,000 = 50,000
Rent expenses 10 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} = 10 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} x 1,000,000 = 100,000
Total expenses = entertainment expense + utility expense + payroll expense + depreciation expense + rent expense = 100,000 + 200,000 + 150,000 + 50,000 + 100,000 = $ 600,000
Now, we will prepare income summary account:
| DEBIT | CREDIT | ||
|
Cost of sales Entertainment expesne Utility expense Payroll expense Depreciation expense Rent expense |
800,000 100.000 200,000 150,000 50,000 100,000 |
Revenue Retained earnings (Balancing figure) |
1,000,000 400,000 |
| 1,400,000 | 1,400,000 |
Here the company is incurring loss as the sum of cost of sales and expenses is more than the annual revenue. The entry to record this transaction would be as follows:
| Debit | Credit | |
|
Retained earnings Income summary account |
400,000 |
400,000 |