Chapter 9

Closing the General Ledger

BA. in International BusinessForeign Trade University

Principle of Accounting

Outline

The closing of the general ledgerThe profit and loss summary accountClosing a ledger accountThe general journal and closing entriesTransfer of net profitAccounting 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/c

Mar 31 Expense a/c 55,000

Capital (net profit) 15,000

70,000

Mar 31 Revenue a/c 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 accountCash sales a/c

Mar 31 P&L Summary 60,000 Mar 31 Cash at bank 60,000

Credit sales a/c

Mar 31 P&L Summary 10,000 Mar 31 Debtors 10,000

Cost of sales a/c

Mar 31 Stock control 35,000 Mar 31 P&L Summary 35,000

Wages a/c

Mar 31 Cash at bank 15,000 Mar 31 P&L Summary 15,000

Advertising a/c

Mar 31 Cash at bank 5,000 Mar 31 P&L Summary 5,000

The general journal and closing entries

Date Accounts Post ref Debit Credit

Mar 31 Cash sales 60,000

Credit sales 10,000

P&L Summary 70,000

Closing entries

Mar 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 profit

Date Accounts Post ref

Debit Credit

Mar 31 P&L Summary 15,000

Capital 15,000

Transfer of net profit

Mar 31 Capital 10,000

Drawings 10,000

Transfer of drawings

Transfer of net profitLedger accounts

Drawings a/c

Mar 31 Cash at bank 10,000 Mar 31 Capital 10,000

Capital a/c

Mar 31 Drawings 10,000

Mar 31 Balance 25,000

35,000

Mar 31 Capital 10,000

Mar 31 P&L Summary 15,000

35,000

Apr 1 Balance 25,000

Post-closing capital account

Statement of financial position (extract) as at 31 Mar 05

Owner’s equity $ $ $

Capital 20,000

plus Net profit 15,000 35,000

less Drawings 10,000 25,000

Closing entriesTransfer of net loss

P&L Summary a/c

Jun 30 Expense a/c 50,000

50,000

Jun 30 Revenue a/c 45,000

Capital a/c 5,000

50,000

Date Accounts Post ref Debit Credit

Jun 30 Capital 5,000

P&L Summary 5,000

Transfer of net loss

Practice exercises

Exercise 9.1Exercise 9.2Exercise 9.3Exercise 9.4