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Chapter 9 closing the general ledger clc

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Chapter 9 closing the general ledger clc

  1. 1. Principle of Accounting Chapter 9 Closing the General Ledger BA. in International Business Foreign Trade University
  2. 2. 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
  3. 3. 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.
  4. 4. 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
  5. 5. 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.
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. Practice exercisesExercise 9.1Exercise 9.2Exercise 9.3Exercise 9.4

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