The Income Summary Account

Someone posted a question about the Income Summary Account and so I've decided to do a whole blog post about it.

First of all, what is the Income Summary Account?  This is a temporary account where we put all of the revenue and expense accounts.  At the end of the period, this account is emptied into the Retained earnings account.

The best way to understand how the account works is to look at an example.

Assume you have $100 in revenues (a credit balance) and $80 in expenses (a debit balance).  We would first need to move these values into the Income Summary account as follows:

DR Revenues               100

     CR Income Summary              100

DR Income Summary    80

     CR Expenses                            80

After the above entries, our revenue and expense accounts are now zero, while our Income Summary account is now a credit of 20 (think: 100 credit and 80 debit nets to a 20 credit).  We would then "empty out" our Income Summary account into the Retained Earnings account that sits within the Shareholders' Equity.

DR Income Summary    20

     CR Retained Earnings               20

Now what would happen if revenues would be less than expenses?