Closing Entries

As a process in the preparation reports, closing entries are required as to:

• allow revenue and expense accounts to be closed off to one account to determine profit/loss for a period. This can then be transferred to the capital account.
• prepare the accounts for the new period by returning all revenue and expense accounts to a zero balance. This ensures that they do not carry over to the next period where they are irrelevant.

Process: An interim (temporary) ledger called ‘Profit and Loss Summary’ is created and all revenue and expense accounts are “closed off” to this account in a determination of profit/loss. This amount, and drawings, is then ‘transferred’ to the capital ledger.[1]

Entries:

-Expense [DR: P/L Summary, CR: expense a/c.]                     }’Closing Entry.’ [2]

-Revenue [DR: revenue a/c, CR: P/L Summary.]         }’Closing Entry.’

-If Profit [DR: P/L Summary, CR: Capital.]                 }’Transfer Entry.’

-If Loss [DR: Capital, CR: P/L Summary.]                   }’Transfer Entry.’

-Drawings [DR: Capital, CR: P/L Summary.]               }’Transfer Entry.’

Example:

Profit and Loss Summary A/C[3]
Dec. 31  Expense Accounts     40 000 Dec. 31  Capital (Net Profit)    10 000 50 000	Dec. 31 Revenue Accounts     50 000 50 000

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[1] In the OE section of the statement of financial position, capital, drawings and profit/loss are still shown separately.

[2] Narration in general journal.

[3] Only total revenues/expenses posted

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Ashish Sharma completed his VCE in 2005 and achieved a perfect score of 50 in Accounting. These are his notes, which he has generously donated to the VCE help community.

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