What does an income summary account do?

The income summary account serves a specific purpose in the accounting process, particularly at the end of an accounting period. It is fundamentally used to provide a summary of the company’s operational results—specifically, it calculates the net income or net loss for that period.

Once the revenue and expense accounts are closed at the end of the period, their balances are transferred to the income summary account. This account thereby reflects the overall profitability of the company for that specific timeframe, summarizing the financial performance based on the revenues earned and the expenses incurred. After this summary has been established, the net income or loss is then transferred to the retained earnings account, thus impacting the equity of the business.

This distinct function of summarizing net income or net loss is crucial for financial reporting and provides valuable insights for financial statements. It allows stakeholders, including management and investors, to assess the company's performance and make informed financial decisions.