Which account is used to summarize the difference between revenues and expenses?

• A. Cash
• B. Retained Earnings
• C. Accounts Receivable
• D. Income Summary Account

Answer: (D)

The concept being tested is the closing process and the use of a temporary account to determine net income or loss. The Income Summary account is specifically designed to accumulate the difference between revenues and expenses for the period. Revenues are closed into Income Summary and expenses are closed into Income Summary, so the balance in this account after both steps represents net income (credit balance) or net loss (debit balance). That net amount is then transferred to Retained Earnings to update equity for the period.

For example, if total revenues are 100,000 and total expenses are 70,000, Income Summary ends with a 30,000 credit balance, representing net income. Closing Income Summary to Retained Earnings then moves 30,000 to Retained Earnings and leaves Income Summary with zero. If expenses exceeded revenues, the Income Summary would carry a debit balance, and that amount would be transferred to Retained Earnings accordingly.

Cash, Accounts Receivable, and other permanent accounts aren’t used to summarize the period’s difference; they capture ongoing, current balances. Retained Earnings is the destination for the final net income or net loss after the Income Summary is closed.