This document summarizes the process of closing the general ledger at the end of an accounting period. It discusses transferring revenue and expense account balances to the profit and loss summary account to calculate net profit or loss. Closing entries are then made to zero out revenue and expense accounts by transferring their balances to the profit and loss summary. Net profit is transferred to the capital account, while a net loss is transferred from the profit and loss summary to debit the capital account. The general journal is used to record these closing entries.

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