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April 21, 2022

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Income Summary Account Example, Advantages, Disadvantages

The operating activities on the CFS include any sources and uses of cash from running the business and selling its products or services. Cash from operations includes any changes made in cash accounts income summary account receivable, depreciation, inventory, and accounts payable. These transactions also include wages, income tax payments, interest payments, rent, and cash receipts from the sale of a product or service.

In a partnership, separate entries are made to close each partner’s drawing account to his or her own capital account. If a corporation has more than one class of stock and uses dividend accounts to record dividend payments to investors, it usually uses a separate dividend account for each class. If this is the case, the corporation’s accounting department makes a compound entry to close each dividend account to the retained earnings account. Although merchandising and service companies use the same four closing entries, merchandising companies usually have more temporary accounts to close.

Example of a Cash Flow Statement

Under US GAAP there is no specific requirement on how accounts should be presented. IFRS requires that accounts be classified into current and noncurrent categories for both assets and liabilities, but no specific presentation format is required. Thus, for US companies, the first category always seen on a Balance Sheet is Current Assets, and the first account balance reported is cash.

All revenue and expense accounts must end with a zero balance because they are reported in defined periods and are not carried over into the future. For example, $100 in revenue this year does not count as $100 of revenue for next year, even if the company retained the funds for use in the next 12 months. In this way, the income statement and balance sheet are closely related.

One more step…

If a company has an inventory turnover ratio of 2 to 1, it means that the company’s inventory turned over twice in the reporting period. Let’s look at each of the first three financial statements in more detail. Financial statements give a glimpse into the operations of a company, and investors, lenders, owners, and others rely on the accuracy of this information when making future investing, lending, and growth decisions. When one of these statements is inaccurate, the financial implications are great.

Next, transfer the $2,500 in your expense account to your income summary account. First, transfer the $5,000 in your revenue account to your income summary account. You need to create closing journal entries by debiting and crediting the right accounts.

Explanation of Income Summary Account

Investing activities include any sources and uses of cash from a company’s investments in the long-term future of the company. A purchase or sale of an asset, loans made to vendors or received from customers, or any payments related to a merger or acquisition is included in this category. Investors can also see how well a company’s management is controlling expenses to determine whether a company’s efforts in reducing the cost of sales might boost profits over time.

• Balance sheets will show a more thorough overview of the security and investment health of a business, however they are both indispensable financial statements.
• Together, financial statements communicate how a company is doing over time and against its competitors.
• For example, IFRS-based financial statements are only required to report the current period of information and the information for the prior period.
• The income summary account is prepared by debiting revenue accounts and crediting expense accounts.
• By comparing financial statements to other companies, analysts can get a better sense of which companies are performing the best and which are lagging behind the rest of the industry.
• The last closing entry reduces the amount retained by the amount paid out to investors.
• In ExxonMobil’s statement of changes in equity, the company also records activity for acquisitions, dispositions, amortization of stock-based awards, and other financial activity.

The income statement, along with balance sheet and cash flow statement, helps you understand the financial health of your business. The income summary account is an intermediate account that is used to close the books. It is used when a company chooses to transfer the balance of individual revenue and expense accounts directly to retained earnings. The income summary account is also used when a company chooses to close the books using an income statement. The financial statements are used by investors, market analysts, and creditors to evaluate a company’s financial health and earnings potential. The three major financial statement reports are the balance sheet, income statement, and statement of cash flows.