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Example Closing Process Explanation

the income summary account is also called

Likewise, shifting expenses out of the income statement requires one to credit all of the expense accounts for the total amount of expenses recorded in the period, and debit the income summary account. Similarly, to close expense accounts, each expense account’s balance is transferred to the income summary account. This involves crediting each expense account for its balance and debiting the income summary account by the same amount.

The balances in each of the temporary accounts would then be closed out in either capital account as applied for sole proprietorship business and retained earnings as applied for the corporation. The professionals should not be confused with the income statement, and income summary account as both of the concepts rely on the reports of income and losses earned and incurred by the business. At the end of a period, the balances of all income and expense accounts are transferred to the income summary account. Afterward, its balance is transferred to the retained earnings (for corporations) or capital accounts (for partnerships).

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From step 1 and 2, we can see that total revenues and expenses are $187,000 and $160,000 respectively. That means CCC has earned a net profit of $27,000 for the year ended 31 December 2022. This means that recording a transaction in the period in which they occurred is paramount. Therefore, starting the year with temporary accounts at zero balance is important. In this case, the income summary account has a net credit balance which means that the company has a net income of $5 million. Without these accounts, accounting errors from transitioning the revenue and expense balances would be significantly more frequent.

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Step 1: Close the Revenue Accounts

This process involves several key steps, with income summary accounts serving as pivotal tools to facilitate the transition of balances from temporary to permanent accounts. Firstly, revenue accounts are closed by transferring their balances to the income summary account through a debit to each revenue account and a corresponding credit to the income summary account. During the closing process at the end of an accounting period, all revenue accounts’ credit balances are transferred to the income summary. Simultaneously, the debit balances of expense accounts are also transferred to this account. These transfers effectively reset the temporary revenue and expense accounts to zero balances, preparing them for the upcoming accounting period.

the income summary account is also called