Introduction to Closing Income Summary Account

How would you close the Income Summary account for M. Smuts with a net income of $5,000?

A. debit to M. Smuts Capital, $5,000

B. credit to M. Smuts Capital, $5,000

C. debit to Income Summary, $5,000

D. both B and C are correct

Answer:

The entry to close the Income Summary account for M. Smuts with a net income of $5,000 would include a credit to M. Smuts Capital and a debit to the Income Summary account.

When M. Smuts shows a net income of $5,000, the proper entry to close the Income Summary account involves crediting M. Smuts Capital and debiting the Income Summary account for the same amount. This ensures that the net income is transferred to the capital account.

By crediting M. Smuts Capital, the company's capital account reflects the increase in equity due to the net income generated. At the same time, debiting the Income Summary account closes out this temporary account, ensuring that the profits are properly allocated to the appropriate accounts.

It is important to accurately close the Income Summary account at the end of the accounting period to ensure that the company's financial statements accurately reflect its performance. This process is essential for tracking the company's profits and ensuring proper allocation of income.

Understanding how to close the Income Summary account is a fundamental concept in accounting, as it helps maintain the accuracy and integrity of financial records. By following the correct procedures, businesses can ensure that their financial statements provide an accurate representation of their financial health.