Question

What does the Closing Entry do and What is the Income Summary Account?

Answer 1

We record closing entries to close the temporary accounts, which are revenue accounts, expense accounts and dividend or owner's withdrawal account, at the end of the accounting period to transfer the net profit earned or net loss incurred to the retained earnings or owner's equity account.

Income Summary absorbs the revenue accounts and expense accounts in it and transfer the net profit earned or net loss incurred to the retained earnings or owner's equity account. It is also a temporary account opened only to close the remaining temporary accounts.