Accounting Fundamentals Certification (AFC) Practice Test

When total expenses exceed total revenue, this situation results in a net loss for the accounting period. This net loss is reflected in the income summary account, which ultimately indicates the financial performance of a business.

A journal entry will be made to transfer the balances from the revenue and expense accounts into the income summary account at the end of the accounting period. Since total expenses are greater than total revenues, the income summary will ultimately show a debit balance. This debit balance signifies that the business has incurred more costs than it has generated in sales, thereby reflecting a loss.

This net loss then impacts the owner's capital account. It results in a decrease in the owner's equity, as losses reduce the overall equity that owners have in the business. Thus, while the income summary account's debit balance indicates expenses exceeding revenues, it is important to recognize that this outcome also leads to a decrease in the owner's capital account.