What is the purpose of the income summary account?

• A. To record cash flows
• B. To summarize the difference between revenues and expenses
• C. To list assets and liabilities
• D. To track payroll taxes

Answer: (B)

The main idea here is that the income summary account acts as a temporary clearing space during the closing process to determine the period’s profit or loss. Revenues and expenses are closed into this account so its balance shows net income (revenues minus expenses) or net loss for the period. That net amount is then transferred to retained earnings, which updates the owner’s equity for the period and leaves the income summary with a zero balance for the next period. This account itself doesn’t hold cash, nor does it list assets or liabilities or track payroll taxes; those are handled by other accounts.