Question

After the first two closing entries are made, Income Summary has a credit balance of $125,500. What does this indicate about the company’s net income or loss?

a) Net income of $125,500
b) Net loss of $125,500
c) No net income or loss
d) Cannot be determined from the information provided

Answer 1

A credit balance in the Income Summary account after the first two closing entries indicates that the company has a net income, which in this case is $125,500 (option a) .

Step-by-step explanation:

When the Income Summary account has a credit balance after the first two closing entries, it indicates the amount of net income the company has earned. The credit balance of $125,500 thus represents the company's net income for the period. Consequently, the correct answer to the student's question is a) Net income of $125,500.

The Income Summary account is used during the closing process in accounting to compile all revenue and expense transactions of a company for a specific period. If revenues exceed expenses, the Income Summary will have a credit balance, reflecting net income. Conversely, if expenses exceed revenues, there would be a debit balance, representing a net loss.