The closing of the General Ledger Chapter 9

The closing of the general ledger Transactions are entered in Journals Journals are totalled And posted to Ledgers Footings prepared Trial Balance prepared And then …

We close Revenue & Expenses account To Work out Profit Get the accounts ready for the next Reporting period by taking the Revenue & Expense accounts back to zero

Profit determination Revenue earned less Expenses incurred equals profit Revenue & Expense accounts are transferred to the Profit & Loss Summary account This leaves a $0 figure in all the Revenue & Expense accounts

Revenue accounts An increasing Revenue account gets a Credit To decrease Revenue, it gets a Debit Sales Mar 31 Profit & Loss account 10000 Mar 31 Bank 4000 Debtors 6000 10000 10000

Profit & Loss Summary account Credit in P&L Summary Profit & Loss account Mar 31 Revenue accounts 10000

Closing entries & the General Journal Closing entries are unusual, infrequent, non cash transactions so A record is made of them in the General Journal

General Journal Date Details Dr Cr Mar 31 Sales 10000 P&L Summary account 10000 Closing entries

Expense accounts An increasing Expense account gets a Debit To decrease an Expense, it gets a Credit Electricity Mar 31 Bank 500 Mar 31 Profit & Loss account 500 500 500

Profit & Loss Summary account Debit in P&L Summary Profit & Loss account Mar 31 Expense accounts 500 Mar 31 Revenue accounts 10000

General Journal Date Details Dr Cr Mar 31 Sales 10000 P&L Summary account 10000 Closing entries P&L Summary account 500 Electricity 500

Profit & Loss Summary account Debit in P&L Summary = a profit (more revenue than expense) Profit & Loss account Mar 31 Expense accounts 500 Capital (net profit) 9500 Mar 31 Revenue accounts 10000

Profit & Loss Summary account Credit in P&L Summary = a loss (more expenses than revenue Profit & Loss account Mar 31 Expense accounts 10500 Mar 31 Revenue accounts 10000 Capital (net loss) 500

General Journal Date Details Dr Cr Mar 31 P&L Summary account 9500 Capital 9500 Transfer of net profit Capital 500 P&L Summary account 500 Transfer of net loss

Capital account Capital Mar 31 Drawings 10000 Balance ? 11500 Mar 31 Balance 2000 P&L Summary 9500 11500

Capital balanced These details are reported in the Balance Sheet Mar 31 Drawings 10000 Balance 1500 11500 Mar 31 Balance 2000 P&L Summary 9500 11500

Balance Sheet Assets Liabilities Owner’s Equity Capital 2000 Add Net Profit 9500 Less Drawings (9000) 2500

The Profit & Loss Summary is prepared in the General Ledger Most people who look at the businesses books do not understand how to read the ledger accounts. So a Income Statement is also prepared so they can see and make decisions. (There is a question on this in the exercises so remember this point)

Income Statement Revenue Sales Less Cost of Goods Sold Cost of Sales Gross Profit Less Expenses Net Profit

What happens to the Asset & Liability accounts? At the end of the period they are balanced Bank Mar 31 Balance 2000 Sundry Receipts 10000 12000 Mar 31 Sundry Payments 7000 Balance 5000 12000

Carrying the balances down At the start of the next period, the balance is carrying down to start the next month. Bank Mar 31 Balance 2000 Sundry Receipts 10000 12000 Apr 1 Balance 5000 Mar 31 Sundry Payments 7000 Balance 5000 12000

The end