The Accounting Process 7 Final Reports 1 Transaction6 Balance Day 2 Source Adjustments Document 5 Trial Balance 3 Journal 4 Ledger
The Accounting Period Assumption• True profit/loss can only be determined after liquidation• For decision making it is necessary to calculate profit/loss more frequently• For purposes of profit determination the life of the business is divided into arbitrary periods – this is the Accounting period assumption• For most businesses the accounting period corresponds with the financial year: 1 July to 30 June• On 30 June business calculates profit/loss by considering revenues earned and expenses incurred in that period
How is profit calculated?• Profit = Total Revenue – Total Expenses• At the end of each accounting period each revenue and expense account is closed. This means that the balances of each R and E a/c is transferred out of the account to leave a $0 balance. – This facilitates 2 actions: • The balances of the R and E accounts are transferred to another account called the Profit and Loss Summary a/c • At the beginning of the next accounting period information collected in the revenue and expense accounts will relate to just that period
Profit and Loss Summary a/c• Revenue and expense a/cs are closed – reducing their balances to zero ready for the next accounting period.• The Profit and Loss Summary a/c is raised at the end of the period to allow the double entry necessary to close the revenue and expense accounts.
Revenues are debited to close – the P&LSummary a/c is credited
Expenses are credited to close off – theP&L Summary a/c is debited.
• Credit balance in P&L = Net Profit – This indicates there were greater revenues than expenses.• Debit balance in P&L = Net Loss – This indicates there were greater expenses than revenues.
As the owner is entitled to all profits/lossmade by the business the balance of P&La/c is transferred to the Capital a/c.This also closes the P&L Summary a/c forthe period.