An income summary account is a temporary accounting document used specifically at the end of an accounting period to balance all accounts. It is also useful in that it transfers all of the money in revenue and expense accounts into the retained earnings account. By doing this, the income summary account essentially resets the books for the start of a new accounting period. This is also useful in that it can provide information about whether the firm in question made a profit or loss for the period of time being studied.
Business accounting requires that all accounts be balanced so that no amount of money is left unaccounted for when the books are consulted. This requires crediting and debiting accounts as warranted depending on money going into or leaving the company. As each accounting period comes to an end, it is necessary for money found in the income and expense accounts to be reconfigured so that they show up on the balance sheet. One way to do this is to use the income summary account.
The first step in composing an income summary account is to remove everything from the income and revenue statements. All income that is earned during a specific period is entered into this temporary account by debiting the income statement and crediting the income summary. By contrast, any expenses found in the expense account must also be moved. This is done by crediting the expense statement for the entire amount and debiting the income summary for that same amount.
Once this is completed, it is necessary to move everything from the income summary account into the retained earnings account, which is found on a company's balance sheet. The first step is to find the difference between the credits and the debits on the income summary. If there is more credit, it means there is a profit. More debits indicate that there was a loss was sustained by the company in that period.
Finally, this amount, whether it is a profit or a loss, is then entered into the retained earnings account. A loss means that the income summary account would be credited for that amount lost and the retained earnings would be debited for that same amount. If a profit was realized, the income summary would be debited and the retained earnings would be credited. In this way, all accounts are balanced, and the income and expense accounts are cleared for new entries to be made.