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10.4 The closing process

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VCE Accounting - Michael Allison
VCE Accounting - Michael Allison

VCE Accounting

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10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  Which journal are closing entries performed in?… 10.4 THE CLOSING PROCESS Cash receipt Cheque butt Sales invoice Purchase invoice Cash Receipts Journal Cash Payments Journal Sales Journal Purchases Journal Any cash received? Any cash paid? Credit sale made? Credit purchase of stock made? Memo General Journal Any other transaction?
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 1: all Revenue accounts are closed together… Cash Sales [R] 30 Jun Cash 9000 Profit and Loss Summary [OE] Credit Sales [R] 30 Jun Debtors control 12000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ Cash Sales [R] 30 Jun Profit and Loss Summary 9000 30 Jun Cash 9000 9000 9000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit Sales [R] 30 Jun Profit and Loss Summary 12000 30 Jun Debtors control 12000 12000 12000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit sales 12000 Profit and Loss Summary [OE] 30 Jun Revenue accounts 21000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit sales 12000 P&L Summary 21000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit sales 12000 P&L Summary 21000 Closing of Revenue a/c’s 10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 2: all Expense accounts are closed together… Wages [E] 30 Jun Cash 6000 Profit and Loss Summary [OE] 30 Jun Revenue accounts 21000 Rent [E] 30 Jun Cash 9000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ Profit and Loss Summary [OE] 30 Jun Expense accounts 15000 30 Jun Revenue accounts 21000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Profit & Loss Summary 15000 Wages [E] 30 Jun Cash 6000 30 Jun Profit and Loss Summary 6000 6000 6000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Profit & Loss Summary 15000 Wages 6000 Rent [E] 30 Jun Cash 9000 30 Jun Profit and Loss Summary 9000 9000 9000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Profit & Loss Summary 15000 Wages 6000 Rent 9000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Profit & Loss Summary 15000 Wages 6000 Rent 9000 Closing of Expense a/c’s 10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  The Profit and Loss Summary account enables the firm to determine whether it has made either a… Profit and Loss Summary [OE] 30/6 Expense a/c’s 5100 30/6 Revenue a/c’s 9400 9400 9400 Net Profit Net Loss Revenue - Expenses = Net Profit (Loss) Profit and Loss Summary [OE] 30/6 Expense a/c’s 5100 30/6 Revenue a/c’s 9400 9400 9400 9400 Profit and Loss Summary [OE] 30/6 Expense a/c’s 5100 30/6 Revenue a/c’s 9400 9400 9400 5100 Profit and Loss Summary [OE] 30/6 Expense a/c’s 5100 30/6 Revenue a/c’s 9400 30/6 Capital 4300 9400 9400 4300 Profit and Loss Summary [OE] 30/6 Expense a/c’s 7800 30/6 Revenue a/c’s 5900 7800 7800 Revenue - Expenses = Net Profit (Loss) Profit and Loss Summary [OE] 30/6 Expense a/c’s 7800 30/6 Revenue a/c’s 5900 7800 7800 5900 Profit and Loss Summary [OE] 30/6 Expense a/c’s 7800 30/6 Revenue a/c’s 5900 7800 7800 7800 Profit and Loss Summary [OE] 30/6 Expense a/c’s 7800 30/6 Revenue a/c’s 5900 30/6 Capital 1900 7800 7800 (1900) 10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 3: close the Profit and Loss Summary account to the Capital account… Revenue = $21,000 Expenses = $15,000-- Net Profit = $6,000= Profit and Loss Summary [OE] 30 Jun Expense accounts 15000 30 Jun Revenue accounts 21000 10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 3: close the Profit and Loss Summary account to the Capital account…  The balance in the Profit and Loss Summary account is then transferred to the Capital account because:  A Net Profit will  Owner’s Equity  A Net Loss will  Owner’s Equity Capital [OE] NetProfit NetLoss 10.4 THE CLOSING PROCESS Debit Credit Owner’s Equity   Debit Credit Owner’s Equity   Debit Credit Owner’s Equity  
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 3: close the Profit and Loss Summary account to the Capital account… Profit and Loss Summary [OE] 30 Jun Expense accounts 15000 30 Jun Revenue accounts 21000 Capital [OE] Profit and Loss Summary [OE] 30 Jun Expense accounts 15000 30 Jun Revenue accounts 21000 21000 Profit and Loss Summary [OE] 30 Jun Expense accounts 15000 30 Jun Revenue accounts 21000 21000 21000 Profit and Loss Summary [OE] 30 Jun Expense accounts 15000 30 Jun Revenue accounts 21000 30 Jun Capital 6000 21000 21000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Profit and Loss Summary 6000 Capital [OE] 30 Jun Profit and Loss Summary 6000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Profit and Loss Summary 6000 Capital 6000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Profit and Loss Summary 6000 Capital 6000 Transfer of Net Profit 10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 4: close Drawings to the Capital account…  The Drawings account must be closed to capital because drawings represent a withdrawal of capital by the owner. Hence:  Drawings will  Capital Capital [OE] Drawings 10.4 THE CLOSING PROCESS Debit Credit Owner’s Equity   Debit Credit Owner’s Equity  
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 4: close Drawings to the Capital account… Drawings [-OE] 30 Jun Cash 13000 Capital [OE] General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ Capital [OE] 30 Jun Drawings 13000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Capital 13000 Drawings [-OE] 30 Jun Cash 13000 30 Jun Capital 13000 13000 13000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Capital 13000 Drawings 13000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Capital 13000 Drawings 13000 Transfer of Drawings 10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  What is the purpose of closing… 1. Determine Net Profit for this period 2. Reset Revenue and Expense balances to zero so Net Profit can be determined for next period Profit & Loss Summary Drawings 1. Determine the reduction in Capital that has occurred this period 2. Reset the balance of Drawings to zero so drawings can be determined for next period 10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 5: balance the Capital account for the next period…  As with all Balance Sheet accounts, the Capital account must be balanced in preparation for the next period Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Profit and Loss Summary 6000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Profit and Loss Summary 6000 126000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Profit and Loss Summary 6000 126000 126000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  While this business made a Net Profit, its overall Capital balance went down? Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 Why? 10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  Because Capital will increase/decrease due to:  Net Profit and Net Loss  Capital contributions and Drawings Capital [OE] NetProfit NetLoss Capital contribution Drawings 10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  While this business made a Net Profit of $6,000, the owner made Drawings of $13,000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use  The Owner’s Equity section of the Balance Sheet must change to reflect this… Balance Sheet as at 31 December 2015 $ $ Owner’s Equity Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 Balance Sheet as at 31 December 2015 $ $ Owner’s Equity Capital 120000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 Balance Sheet as at 31 December 2015 $ $ Owner’s Equity Capital 120000 plus Net Profit (Loss) 6000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 Balance Sheet as at 31 December 2015 $ $ Owner’s Equity Capital 120000 plus Net Profit (Loss) 6000 126000 Balance Sheet as at 31 December 2015 $ $ Owner’s Equity Capital 120000 plus Net Profit (Loss) 6000 126000 less Drawings 13000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 Balance Sheet as at 31 December 2015 $ $ Owner’s Equity Capital 120000 plus Net Profit (Loss) 6000 126000 less Drawings 13000 113000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use The Closing Process… Step 1: all Revenue accounts are closed together… Step 2: all Expense accounts are closed together… Step 3: close the Profit and Loss Summary account to the Capital account… Step 4: close Drawings to the Capital account… Step 5: balance the Capital account for the next period… 10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit sales 12000 P&L Summary 21000 Closing of Revenue a/c’s General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit sales 12000 P&L Summary 21000 Closing of Revenue a/c’s 30 Jun Profit & Loss Summary 15000 Wages 6000 Rent 9000 Closing of Expense a/c’s General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit sales 12000 P&L Summary 21000 Closing of Revenue a/c’s 30 Jun Profit & Loss Summary 15000 Wages 6000 Rent 9000 Closing of Expense a/c’s 30 Jun Profit and Loss Summary 6000 Capital 6000 Transfer of Net Profit General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit sales 12000 P&L Summary 21000 Closing of Revenue a/c’s 30 Jun Profit & Loss Summary 15000 Wages 6000 Rent 9000 Closing of Expense a/c’s 30 Jun Profit and Loss Summary 6000 Capital 6000 Transfer of Net Profit 30 Jun Capital 13000 Drawings 13000 Transfer of Drawings Step 3 Step 1 Step 2 Step 4 10.4 THE CLOSING PROCESS
© Michael Allison, Trinity Grammar School. Author’s permission required for external use TASK In-class Homework SQ11 X SQ5 X SQ9 X SQ10 X Ex10.1 X Ex10.2 X Ex10.3 X Ex10.4 X Ex10.5 x Ex10.6 X Ex10.7 X

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10.4 The closing process

  • 2. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  Which journal are closing entries performed in?… 10.4 THE CLOSING PROCESS Cash receipt Cheque butt Sales invoice Purchase invoice Cash Receipts Journal Cash Payments Journal Sales Journal Purchases Journal Any cash received? Any cash paid? Credit sale made? Credit purchase of stock made? Memo General Journal Any other transaction?
  • 3. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 1: all Revenue accounts are closed together… Cash Sales [R] 30 Jun Cash 9000 Profit and Loss Summary [OE] Credit Sales [R] 30 Jun Debtors control 12000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ Cash Sales [R] 30 Jun Profit and Loss Summary 9000 30 Jun Cash 9000 9000 9000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit Sales [R] 30 Jun Profit and Loss Summary 12000 30 Jun Debtors control 12000 12000 12000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit sales 12000 Profit and Loss Summary [OE] 30 Jun Revenue accounts 21000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit sales 12000 P&L Summary 21000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit sales 12000 P&L Summary 21000 Closing of Revenue a/c’s 10.4 THE CLOSING PROCESS
  • 4. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 2: all Expense accounts are closed together… Wages [E] 30 Jun Cash 6000 Profit and Loss Summary [OE] 30 Jun Revenue accounts 21000 Rent [E] 30 Jun Cash 9000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ Profit and Loss Summary [OE] 30 Jun Expense accounts 15000 30 Jun Revenue accounts 21000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Profit & Loss Summary 15000 Wages [E] 30 Jun Cash 6000 30 Jun Profit and Loss Summary 6000 6000 6000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Profit & Loss Summary 15000 Wages 6000 Rent [E] 30 Jun Cash 9000 30 Jun Profit and Loss Summary 9000 9000 9000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Profit & Loss Summary 15000 Wages 6000 Rent 9000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Profit & Loss Summary 15000 Wages 6000 Rent 9000 Closing of Expense a/c’s 10.4 THE CLOSING PROCESS
  • 5. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  The Profit and Loss Summary account enables the firm to determine whether it has made either a… Profit and Loss Summary [OE] 30/6 Expense a/c’s 5100 30/6 Revenue a/c’s 9400 9400 9400 Net Profit Net Loss Revenue - Expenses = Net Profit (Loss) Profit and Loss Summary [OE] 30/6 Expense a/c’s 5100 30/6 Revenue a/c’s 9400 9400 9400 9400 Profit and Loss Summary [OE] 30/6 Expense a/c’s 5100 30/6 Revenue a/c’s 9400 9400 9400 5100 Profit and Loss Summary [OE] 30/6 Expense a/c’s 5100 30/6 Revenue a/c’s 9400 30/6 Capital 4300 9400 9400 4300 Profit and Loss Summary [OE] 30/6 Expense a/c’s 7800 30/6 Revenue a/c’s 5900 7800 7800 Revenue - Expenses = Net Profit (Loss) Profit and Loss Summary [OE] 30/6 Expense a/c’s 7800 30/6 Revenue a/c’s 5900 7800 7800 5900 Profit and Loss Summary [OE] 30/6 Expense a/c’s 7800 30/6 Revenue a/c’s 5900 7800 7800 7800 Profit and Loss Summary [OE] 30/6 Expense a/c’s 7800 30/6 Revenue a/c’s 5900 30/6 Capital 1900 7800 7800 (1900) 10.4 THE CLOSING PROCESS
  • 6. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 3: close the Profit and Loss Summary account to the Capital account… Revenue = $21,000 Expenses = $15,000-- Net Profit = $6,000= Profit and Loss Summary [OE] 30 Jun Expense accounts 15000 30 Jun Revenue accounts 21000 10.4 THE CLOSING PROCESS
  • 7. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 3: close the Profit and Loss Summary account to the Capital account…  The balance in the Profit and Loss Summary account is then transferred to the Capital account because:  A Net Profit will  Owner’s Equity  A Net Loss will  Owner’s Equity Capital [OE] NetProfit NetLoss 10.4 THE CLOSING PROCESS Debit Credit Owner’s Equity   Debit Credit Owner’s Equity   Debit Credit Owner’s Equity  
  • 8. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 3: close the Profit and Loss Summary account to the Capital account… Profit and Loss Summary [OE] 30 Jun Expense accounts 15000 30 Jun Revenue accounts 21000 Capital [OE] Profit and Loss Summary [OE] 30 Jun Expense accounts 15000 30 Jun Revenue accounts 21000 21000 Profit and Loss Summary [OE] 30 Jun Expense accounts 15000 30 Jun Revenue accounts 21000 21000 21000 Profit and Loss Summary [OE] 30 Jun Expense accounts 15000 30 Jun Revenue accounts 21000 30 Jun Capital 6000 21000 21000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Profit and Loss Summary 6000 Capital [OE] 30 Jun Profit and Loss Summary 6000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Profit and Loss Summary 6000 Capital 6000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Profit and Loss Summary 6000 Capital 6000 Transfer of Net Profit 10.4 THE CLOSING PROCESS
  • 9. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 4: close Drawings to the Capital account…  The Drawings account must be closed to capital because drawings represent a withdrawal of capital by the owner. Hence:  Drawings will  Capital Capital [OE] Drawings 10.4 THE CLOSING PROCESS Debit Credit Owner’s Equity   Debit Credit Owner’s Equity  
  • 10. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 4: close Drawings to the Capital account… Drawings [-OE] 30 Jun Cash 13000 Capital [OE] General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ Capital [OE] 30 Jun Drawings 13000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Capital 13000 Drawings [-OE] 30 Jun Cash 13000 30 Jun Capital 13000 13000 13000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Capital 13000 Drawings 13000 General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Capital 13000 Drawings 13000 Transfer of Drawings 10.4 THE CLOSING PROCESS
  • 11. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  What is the purpose of closing… 1. Determine Net Profit for this period 2. Reset Revenue and Expense balances to zero so Net Profit can be determined for next period Profit & Loss Summary Drawings 1. Determine the reduction in Capital that has occurred this period 2. Reset the balance of Drawings to zero so drawings can be determined for next period 10.4 THE CLOSING PROCESS
  • 12. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  Step 5: balance the Capital account for the next period…  As with all Balance Sheet accounts, the Capital account must be balanced in preparation for the next period Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Profit and Loss Summary 6000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Profit and Loss Summary 6000 126000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Profit and Loss Summary 6000 126000 126000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 10.4 THE CLOSING PROCESS
  • 13. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  While this business made a Net Profit, its overall Capital balance went down? Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 Why? 10.4 THE CLOSING PROCESS
  • 14. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  Because Capital will increase/decrease due to:  Net Profit and Net Loss  Capital contributions and Drawings Capital [OE] NetProfit NetLoss Capital contribution Drawings 10.4 THE CLOSING PROCESS
  • 15. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  While this business made a Net Profit of $6,000, the owner made Drawings of $13,000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 10.4 THE CLOSING PROCESS
  • 16. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  The Owner’s Equity section of the Balance Sheet must change to reflect this… Balance Sheet as at 31 December 2015 $ $ Owner’s Equity Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 Balance Sheet as at 31 December 2015 $ $ Owner’s Equity Capital 120000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 Balance Sheet as at 31 December 2015 $ $ Owner’s Equity Capital 120000 plus Net Profit (Loss) 6000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 Balance Sheet as at 31 December 2015 $ $ Owner’s Equity Capital 120000 plus Net Profit (Loss) 6000 126000 Balance Sheet as at 31 December 2015 $ $ Owner’s Equity Capital 120000 plus Net Profit (Loss) 6000 126000 less Drawings 13000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 Balance Sheet as at 31 December 2015 $ $ Owner’s Equity Capital 120000 plus Net Profit (Loss) 6000 126000 less Drawings 13000 113000 Capital [OE] 30 Jun Drawings 13000 1 Jun Balance 120000 30 Jun Balance 113000 30 Jun Profit and Loss Summary 6000 126000 126000 1 Jul Balance 113000 10.4 THE CLOSING PROCESS
  • 17. © Michael Allison, Trinity Grammar School. Author’s permission required for external use The Closing Process… Step 1: all Revenue accounts are closed together… Step 2: all Expense accounts are closed together… Step 3: close the Profit and Loss Summary account to the Capital account… Step 4: close Drawings to the Capital account… Step 5: balance the Capital account for the next period… 10.4 THE CLOSING PROCESS
  • 18. © Michael Allison, Trinity Grammar School. Author’s permission required for external use General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit sales 12000 P&L Summary 21000 Closing of Revenue a/c’s General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit sales 12000 P&L Summary 21000 Closing of Revenue a/c’s 30 Jun Profit & Loss Summary 15000 Wages 6000 Rent 9000 Closing of Expense a/c’s General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit sales 12000 P&L Summary 21000 Closing of Revenue a/c’s 30 Jun Profit & Loss Summary 15000 Wages 6000 Rent 9000 Closing of Expense a/c’s 30 Jun Profit and Loss Summary 6000 Capital 6000 Transfer of Net Profit General Journal Date Details General Ledger Subsidiary Ledger Debit $ Credit $ Debit $ Credit $ 30 Jun Cash sales 9000 Credit sales 12000 P&L Summary 21000 Closing of Revenue a/c’s 30 Jun Profit & Loss Summary 15000 Wages 6000 Rent 9000 Closing of Expense a/c’s 30 Jun Profit and Loss Summary 6000 Capital 6000 Transfer of Net Profit 30 Jun Capital 13000 Drawings 13000 Transfer of Drawings Step 3 Step 1 Step 2 Step 4 10.4 THE CLOSING PROCESS
  • 19. © Michael Allison, Trinity Grammar School. Author’s permission required for external use TASK In-class Homework SQ11 X SQ5 X SQ9 X SQ10 X Ex10.1 X Ex10.2 X Ex10.3 X Ex10.4 X Ex10.5 x Ex10.6 X Ex10.7 X