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Principle of Accounting Chapter 9 Closing the General Ledger BA. in International Business Foreign Trade University
Outline The closing of the general ledger The profit and loss summary account Closing a ledger account The general journal and closing entries Transfer of net profit Accounting for a net loss
The closing of the general ledger Two basic procedures are performed at the end of a reporting period: Determining the profit earned by the firm during the reporting period. Preparing the ledger accounts in readiness for the new reporting period.
The profit and loss summary account Used to summarise the balances of all revenue and expense accounts in order to calculate the net profit of a business. It is a temporary owner’s equity account and is used only on balance day. The total of all revenue accounts appears on the credit side The total of all expense accounts appears on the debit side Profit and loss summary a/cMar 31 Expense a/c 55,000 Mar 31 Revenue a/c 70,000 Capital (net profit) 15,000 70,000 70,000
Closing a ledger account Involves making an entry in the account opposite to the balance of the account. The closing entries are made on the debit side of revenue accounts and credit side of expense accounts As the closing entries are made, the account balances are brought back to zero.
Closing a ledger account Cash sales a/cMar 31 P&L Summary 60,000 Mar 31 Cash at bank 60,000 Credit sales a/cMar 31 P&L Summary 10,000 Mar 31 Debtors 10,000 Cost of sales a/cMar 31 Stock control 35,000 Mar 31 P&L Summary 35,000 Wages a/cMar 31 Cash at bank 15,000 Mar 31 P&L Summary 15,000 Advertising a/cMar 31 Cash at bank 5,000 Mar 31 P&L Summary 5,000
The general journal andclosing entriesDate Accounts Post ref Debit CreditMar 31 Cash sales 60,000 Credit sales 10,000 P&L Summary 70,000 Closing entriesMar 31 P&L Summary 55,000 Cost of sales 35,000 Wages 15,000 Advertising 5,000 Closing entries
Closing ledger accounts Close off P&L summary Profit is transferred to the credit side of owner’s capital account. Loss is transferred to the debit side of owner’s capital account. Close off drawings account Drawings is transferred to the debit side of owner’s capital account
The general journalTransfer of net profitDate Accounts Post Debit Credit refMar 31 P&L Summary 15,000 Capital 15,000 Transfer of net profitMar 31 Capital 10,000 Drawings 10,000 Transfer of drawings
Transfer of net profit Ledger accounts Drawings a/cMar 31 Cash at bank 10,000 Mar 31 Capital 10,000 Capital a/cMar 31 Drawings 10,000 Mar 31 Capital 10,000Mar 31 Balance 25,000 Mar 31 P&L Summary 15,000 35,000 35,000 Apr 1 Balance 25,000
Post-closing capital accountStatement of financial position (extract) as at 31 Mar 05Owner’s equity $ $ $Capital 20,000plus Net profit 15,000 35,000less Drawings 10,000 25,000
Closing entries Transfer of net loss P&L Summary a/cJun 30 Expense a/c 50,000 Jun 30 Revenue a/c 45,000 Capital a/c 5,000 50,000 50,000 Date Accounts Post ref Debit Credit Jun 30 Capital 5,000 P&L Summary 5,000 Transfer of net loss
Practice exercisesExercise 9.1Exercise 9.2Exercise 9.3Exercise 9.4