To close the Income Summary account at the end of an accounting period, you will typically make an entry that transfers the net income or net loss for the period to the owner's equity or retained earnings account. The entry will vary depending on whether there’s a net income or net loss:
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If there is a Net Income:
- Debit Income Summary: This reduces the Income Summary account to zero.
- Credit Retained Earnings (or Owner's Equity): This increases the Retained Earnings or Owner's Equity account by the amount of net income.
Example Journal Entry:
Debit: Income Summary $X Credit: Retained Earnings $X -
If there is a Net Loss:
- Debit Retained Earnings (or Owner's Equity): This reduces the Retained Earnings or Owner's Equity account by the amount of the net loss.
- Credit Income Summary: This reduces the Income Summary account to zero.
Example Journal Entry:
Debit: Retained Earnings $X Credit: Income Summary $X
In both cases, X represents the net income or net loss amount for the accounting period. This closing entry is part of the closing process in the accounting cycle to prepare for the next period's transactions.