Question

The account called Income Summary is often used in the closing entries. Explain this account’s purpose and how it is used.

a) It is a permanent account used to track income over multiple years
b) It is a temporary account used to summarize revenue and expenses before closing
c) It is an equity account used for dividend distributions
d) It is a liability account used to record outstanding expenses

Answer 1

The Income Summary account is a temporary ledger used in the closing process of accounting to compile revenues and expenses, which helps determine the net income or loss before being closed to equity.

Step-by-step explanation:

The account called Income Summary is often used in the closing entries to transfer the balances of all temporary income and expense accounts to the appropriate capital or retained earnings account. It helps in determining the net result of operations (profit or loss) for a specific accounting period before the temporary accounts are reset for the next period. The correct option is 'b': It is a temporary account used to summarize revenue and expenses before closing. After summarizing the revenue and expenses, the Income Summary account itself is then closed to the capital account (for sole proprietorships and partnerships) or retained earnings account (for corporations).