Multiple Choice
Which of the following items are shown on a balance sheet? Select the correct option.
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1. Introduction to Accounting
The Financial Statements
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Which of the following best defines the Income Summary account?
A
A permanent account that appears on the balance sheet.
B
A temporary account used to close revenue and expense accounts at the end of an accounting period.
C
A contra-asset account used to accumulate depreciation.
D
An account used to record cash inflows and outflows during the year.
Verified step by step guidance1
Understand the concept of the Income Summary account: It is a temporary account used during the closing process to summarize revenues and expenses for the accounting period.
Recognize that the Income Summary account is not a permanent account. Permanent accounts appear on the balance sheet and are carried forward to the next accounting period, while temporary accounts are closed at the end of the period.
Identify the purpose of the Income Summary account: It is used to transfer the balances of revenue and expense accounts to the retained earnings or capital account, effectively resetting these accounts to zero for the next period.
Eliminate incorrect options: The Income Summary account is not a contra-asset account (used for depreciation), nor is it used to record cash inflows and outflows during the year. These descriptions pertain to other types of accounts.
Conclude that the correct definition of the Income Summary account is: 'A temporary account used to close revenue and expense accounts at the end of an accounting period.'
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