1. Principle of Accounting
Chapter 9
Closing the General Ledger
BA. in International Business
Foreign Trade University

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. 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. 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 Mar 31 Revenue a/c 70,000
Capital (net profit) 15,000
70,000 70,000

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. Closing a ledger account
Cash 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

7. 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

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. The general journal
Transfer of net profit
Date Accounts Post Debit Credit
ref
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

10. Transfer of net profit
Ledger 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 Capital 10,000
Mar 31 Balance 25,000 Mar 31 P&L Summary 15,000
35,000 35,000
Apr 1 Balance 25,000

11. 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

12. Closing entries
Transfer of net loss
P&L Summary a/c
Jun 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. Practice exercises
Exercise 9.1
Exercise 9.2
Exercise 9.3
Exercise 9.4