The closing process and Income Summary account

“Closing the books” is an important process in the life cycle of any company. It is necessary for both reporting and tax purposes and helps management assess the health and well-being of the business. In this article, we will look at why the process is necessary and discuss the role played by the Income Summary account at the end of a fiscal year.



1. What is the Income Summary account

?One of the first things learned by accounting students is the accounting equation:

Assets = Liabilities + Equity

We can expand this equation to include revenues earned and expenses incurred:

Assets = Liabilities + Equity + Revenues - Expenses

At the end of the year, closing entries are used to combine revenues and expenses with the Retained Earnings equity account. The Income Summary account is only used during the year-end closing process -- it facilitates the transfer of balances away from the temporary accounts and into the permanent accounts.

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