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The closing of the General Ledger
Chapter 9
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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 …
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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
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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
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Revenue accounts An increasing Revenue account gets a Credit
To decrease Revenue, it gets a Debit Sales Mar 31 Profit & Loss account Mar Bank 4000 Debtors 6000 10000 10000
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Profit & Loss Summary account
Credit in P&L Summary Profit & Loss account Mar 31 Revenue accounts
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Closing entries & the General Journal
Closing entries are unusual, infrequent, non cash transactions so A record is made of them in the General Journal
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General Journal Date Details Dr Cr Mar 31 Sales 10000
P&L Summary account Closing entries
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Expense accounts An increasing Expense account gets a Debit
To decrease an Expense, it gets a Credit Electricity Mar 31 Bank Mar 31 Profit & Loss account 500 500
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Profit & Loss Summary account
Debit in P&L Summary Profit & Loss account Mar 31 Expense accounts Mar 31 Revenue accounts
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General Journal Date Details Dr Cr Mar 31 Sales 10000
P&L Summary account Closing entries P&L Summary account Electricity
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Profit & Loss Summary account
Debit in P&L Summary = a profit (more revenue than expense) Profit & Loss account Mar 31 Expense accounts Capital (net profit) Mar 31 Revenue accounts
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Profit & Loss Summary account
Credit in P&L Summary = a loss (more expenses than revenue Profit & Loss account Mar 31 Expense accounts Mar 31 Revenue accounts Capital (net loss)
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General Journal Date Details Dr Cr Mar 31 P&L Summary account 9500
Capital Transfer of net profit Capital P&L Summary account Transfer of net loss
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Capital account Capital Mar 31 Drawings 10000 Balance ? 11500
Mar 31 Balance P&L Summary 11500
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Capital balanced These details are reported in the Balance Sheet
Mar 31 Drawings Balance 11500 Mar 31 Balance P&L Summary 11500
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Balance Sheet Assets Liabilities Owner’s Equity Capital 2000
Add Net Profit Less Drawings (9000) 2500
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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)
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Income Statement Revenue Sales Less Cost of Goods Sold Cost of Sales
Gross Profit Less Expenses Net Profit
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What happens to the Asset & Liability accounts?
At the end of the period they are balanced Bank Mar 31 Balance Sundry Receipts 12000 Mar 31 Sundry Payments Balance 12000
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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 Sundry Receipts 12000 Apr 1 Balance Mar 31 Sundry Payments Balance 12000
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The end
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