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.
-Expense [DR: P/L Summary, CR: expense a/c.] }’Closing Entry.’ 
-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.’
Profit and Loss Summary A/C
Dec. 31 Expense Accounts 40 000
Dec. 31 Capital (Net Profit) 10 000
|Dec. 31 Revenue Accounts 50 000|
 In the OE section of the statement of financial position, capital, drawings and profit/loss are still shown separately.
 Narration in general journal.
 Only total revenues/expenses posted
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.