Final answer:
The correct statement is that if the Income Summary has a credit balance after revenues and expenses have been closed into it, the closing entry for Income Summary includes a credit to the Retained Earnings account. Closing entries aim to transfer temporary account balances to update the equity section of the balance sheet for the next accounting period.
Step-by-step explanation:
The correct statement among the ones provided is: If the Income Summary has a credit balance after revenues and expenses have been closed into it, the closing entry for Income Summary will include a credit to the Retained Earnings account.
The Income Summary account does not appear on the balance sheet; it is used in the closing process of the accounting cycle. The purpose of closing entries is to transfer the balances of temporary accounts (revenues, expenses, and dividends) to the Retained Earnings account, thus preparing the temporary accounts for the next accounting period. Closing entries do not prepare financial statements; they are done after financial statements are prepared. Also, closing entries are made to close temporary, not permanent, accounts. Permanent accounts (real accounts) are not closed each period and include assets, liabilities, and equity accounts.
The statement regarding the Income Summary account having a credit balance is the correct one because if a company has more revenues than expenses during an accounting period, Income Summary will indeed have a credit balance. This credit balance is then transferred to the Retained Earnings account to update the equity section of the balance sheet, reflecting the net income that was earned during the period. Conversely, if expenses exceed revenues, the Income Summary will have a debit balance, and the closing entry would include a debit to the Retained Earnings account to reflect the net loss.