Chapter 9 Determining Profit or Loss © Cambridge University Press 2012.

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Presentation transcript:

Chapter 9 Determining Profit or Loss © Cambridge University Press 2012

Determining Profit or Loss Profit is calculated by matching revenues earned in a Reporting Period against expenses incurred in the same Reporting Period © Cambridge University Press 2012

Closing the Ledger Closing the ledger means transferring balances from the revenue and expense ledger accounts to the Profit and Loss (P&L) Summary account © Cambridge University Press 2012

Closing the Ledger Closing the ledger is necessary to: calculate profit for the current Reporting Period reset the revenue and expense accounts to zero in readiness for the next Reporting Period © Cambridge University Press 2012

Closing Entries To transfer revenue or expense accounts to the Profit and Loss Summary account, it is necessary to make each balance equal zero This means debiting the revenue account and crediting the expense account © Cambridge University Press 2012

Closing Entries Revenue and expense accounts must be closed to the Profit and Loss Summary account at the end of the Reporting Period The Profit and Loss Summary account is then closed to the Capital account © Cambridge University Press 2012

Transferring Drawings The Drawings account is transferred to the Capital account at the end of the Reporting Period The transfer method is the same as for the Profit and Loss Summary account © Cambridge University Press 2012

The Income Statement The Income Statement aids decision-making by detailing the revenues earned and expenses incurred during the Reporting Period showing both Gross Profit and Net Profit © Cambridge University Press 2012

If the Income Statement and Profit and Loss Summary account have been properly calculated, they should show the same Net Profit figure © Cambridge University Press 2012 The Income Statement