State BPA Fundamental Accounting Practice Exam

What is the purpose of the Income Summary account in accounting?

1. To summarize total liabilities

2. To track income and expenses

3. To balance the balance sheet

4. To close temporary accounts

The correct answer is: To close temporary accounts

The Income Summary account serves a vital role in the accounting cycle, particularly during the closing process at the end of an accounting period. Specifically, its primary purpose is to facilitate the closure of temporary accounts, such as revenues and expenses, which are used to record financial activity over a specific period. At the end of the period, all revenue and expense accounts are closed to the Income Summary account. This allows accountants to tally the total income or loss for that period. After this summary is transferred to the Owner's Equity section of the balance sheet, the revenue and expense accounts can be reset to zero for the next accounting period. This process effectively ensures that only the current period's performance is reflected in the financial statements and that previous periods do not carry over their balances. Therefore, the Income Summary account plays a crucial role in maintaining the integrity and accuracy of financial reporting.