Accounting Fundamentals Certification (AFC) Practice Test

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What is the journal entry to close the Income Summary account when there is a net income?

Debit Income Summary; Credit Owner's Capital

The journal entry to close the Income Summary account when there is a net income involves debiting the Income Summary account and crediting the Owner's Capital account. This process reflects the transfer of the net income for the period into the owner's equity section of the balance sheet.

When the business generates net income, the Income Summary account, which temporarily holds the revenues and expenses for the period, needs to be closed to move this income to the owner's equity. Debiting the Income Summary account reduces its balance to zero, signifying that the income has been allocated. Conversely, crediting the Owner's Capital account increases the owner's equity, thereby acknowledging that the owner's claim on the business has grown as a result of the earnings.

This closing entry is essential for the proper accounting cycle, ensuring that income is accurately reported and reflected in the equity accounts for future reporting periods.

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Credit Income Summary; Debit Owner's Capital

Debit Owner's Capital; Credit Income Summary

Credit Owner's Capital; Debit Income Summary

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