,

Temporary and Permanent Accounts

Revenues Dividends Expenses Liabilities Assets Retained Earnings

Temporary Accounts

Permanent Accounts

Profit and Loss a/c

Account Title

Date

Real (Permanent) Accounts

Item Post. Ref. Debit Credit Debit

Account No. ### Balance Credit

Account Title

Nominal (Temporary) Accounts

Date Item Post. Ref. Debit

Account No. ###

Balance
Debit Credit

Credit

Account Title

Account No. ### Balance

Date

Item

Post. Ref.

Debit

Credit

Debit

Credit

Real Accounts

Real Accounts . . .
Accounts that are not closed to a
zero balance at the end of each accounting period. the Balance Sheet.

Permanent accounts appearing on

Assets

Assets

Liabilities

Liabilities

Owners Equity

Owners Equity

Account Title

Account No. ### Balance

Date

Item

Post. Ref.

Debit

Credit

Debit

Credit

Nominal Accounts

Nominal Accounts . . .
Accounts that are closed to a zero
balance at the end of each accounting period.

Temporary accounts generally

appearing on the Income Statement.

ACCT 201 ACCT 201 ACCT 201

Revenues

Revenues

Expenses

Expenses

What are closing entries?

Closing Entries . . .
Journal entries made at the end of
an accounting period.
They clear all nominal accounts and prepare them to receive transactions in the new accounting period.

They summarize a periods revenues and expenses.

12

Purpose of Closing Entries

Closing entries bring the income
statement accounts back to a zero balance, making them ready for a new set of transactions.

13

Purpose of Closing Entries .

The closing entry process transfers
the net income or net loss for the accounting period to the owners equity and

Reduces owners equity for any

distributions to owners.

14

Is there a set procedure?

Introducing a Account Title new account!

Date Item Post. Ref. Debit

Account No. ### Balance

Profit & Loss Credit Debit a/c Credit

Overview of the Closing Process

FastForward Adjusted Trial Balance December 31, 2001 Cash Accounts receivable Debtors Prepaid insurance Equipment Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned revenue Capital Retained Earnings Consulting revenue Rental revenue Depreciation expense-Equipment Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals $ 3,950 1,800 8,670 2,300 26,000 $ 375 6,200 210 2,750 30,000 7,850 300 375 1,610 100 1,000 1,050 230 47,685 $

600

Using the adjusted trial balance, lets prepare the closing entries for FastForward.

47,685

FastForward Adjusted Trial Balance December 31, 2001 Cash Accounts receivable Debtors Prepaid insurance Equipment Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned revenue Capital Retained Earnings Consulting revenue Rental revenue Depreciation expense-Equipment Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals $ 3,950 1,800 8,670 2,300 26,000 $ 375 6,200 210 2,750 30,000 7,850 300 375 1,610 100 1,000 1,050 230 47,685 $

600

47,685

Close Revenue Accounts to Profit & Loss a/c

GENERAL JOURNAL
Date Description Rental Revenue To Profit & Loss a/c PR Debit 7,850 300 8,150 Dec. 31 Consulting Revenue

Page 34
Credit

Now, lets look at the ledger accounts after posting this closing entry.

Close Revenue Accounts to Profit & Loss a/c

Consulting Revenue 7,850 7,850

Profit & Loss a/c 7,850 300

Rental Revenue 300 300

8,150

FastForward Adjusted Trial Balance December 31, 2001 Cash Accounts receivable Supplies Prepaid insurance Equipment Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned revenue Common Stock Retained Earnings Consulting revenue Rental revenue Depreciation expense-Equipment Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals $ 3,950 1,800 8,670 2,300 26,000 $ 375 6,200 210 2,750 30,000 7,850 300 375 1,610 100 1,000 1,050 230 47,685 $

600

47,685

 Close Expense Accounts to Profit & Loss a/c

GENERAL GENERAL JOURNAL JOURNAL
Date Date Description Description To Depreciation Expense-Equipment To Salaries Expense To Insurance Expense To Rent Expense To Supplies Expense To Utilities Expense PR PR Debit Debit 4,365 375 1,610 100 1,000 1,050 230 Dec. 31 Profit and Loss a/c

Page Page 34 34
Credit Credit

Now, lets look at the ledger accounts after posting this closing entry.

 Close Expense Accounts to Profit & Loss a/c

Depreciation Expense- Eq. 375 375 -

Rent Expense 1,000 1,000 Profit & Loss a/c 375 7,850 1,610 300 100 1,000 1,050 230 3,785 8,150 8,150

Salaries Expense 1,610 1,610 Insurance Expense 100 100 -

Supplies Expense 1,050 1,050 Utilities Expense 230 230 -

Net Profit

Profit & Loss a/c 375 7,850 1,610 300 100 1,000 1,050 230 3,785 8,150 8,150

Net Profit( available to owners)

Close Profit & Loss a/c to Profit & Loss App a/c
GENERAL JOURNAL
Date Description To P&L Appropriation a/c PR Debit 3,785 3,785 Dec. 31 Profit and Loss a/c

Page 34
Credit

Now, lets look at the ledger accounts after posting this closing entry.

Close Profit & Loss a/c to & L Appropriation a/c

Profit & Loss app a/c 600 3,785 3185 3,785 3,785
Retained Earnings

Profit & Loss a/c 375 7,850 1,610 300 100 1,000 1,050 230 3,785 -

Explain and prepare a postclosing trial balance.

Procedural
33

Post-Closing Trial Balance

List of permanent accounts and
their balances after posting closing entries.

Total debits and credits must

be equal.

34

FastForward Post-Closing Trial Balance December 31, 2001 Cash $ 3,950 Accounts receivable 1,800 Debtors 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equipment $ 375 Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 Capital 30,000 Retained Earnings 3,185 Totals $ 42,720 $ 42,720

Balance Sheet

Liabilities & Equity Current liabilities Noncurrent liabilities Equity

Assets Current assets Noncurrent assets Long-term investments Plant assets Intangible assets

Dr. Fred Barbee

37

FINAL ACCOUNTS
Final Accounts is the last step in the accounting
process. Trial Balance is prepared at the end of all the accounting year to know the balances of all the accounts & to test the arithmetic accuracy of accounts. But the basic objective of accounting is to know about the profit or loss during the previous year & present financial position. This can be known only if Trading account and Profit & Loss account and Balance Sheet are prepared at the end pf year. These are also known as FINANCIAL STSTEMENTS which are prepared.

From Trial Balance. Final Accounts include the preparation of : 1) Trading and Profit & Loss account and 2) Balance Sheet as these two statements are prepared to give the final results of the business, both of these are collectively called as final accounts. Accounting cycle finally ends with these statements as shown in next slide:

ACCOUNTING CYCLE
TRANSACTIONS
Entry in the books of Original Entry (ORIGINAL RECORD)

Preparation of final accounts (summary)

Preparation of Trial Balance (CHECKING THE ACCURACY)

Posting in the concerned Ledger account (CLASSIFICATION)

Balancing of Real & Personal accounts

Types of Financial Statement

Final accounts or financial statements can be divided in two parts:-

1) Trading and Profit & Loss Account 2) Balance Sheet

Trading Account
Trading account is prepared by trading concerns i.e., concerns which purchase and sell finished goods, to know the gross profit or gross loss incurred by them from buying and selling of goods during a particular period of time. Gross profit or gross loss is the difference between the cost of goods sold and the proceeds of their sale. If the sale proceeds exceed the cost of goods sold , gross profit is made. Otherwise,gross loss is made.

Ascertainment of Cost of Goods Sold

Opening Stock Add: Purchases Less: Purchase Return Goods Available for Sales . Add: Direct Expenses Less: Closing Stock . Cost of Goods Sold .

. .

Specimen Proforma of Trading Account

Dr Trading Account of .. For the year ending... Cr

Particulars
To Opening Stock To Purchases Less: Returns To Direct Expenses: Carriage Inward Wages Wages & salaries Fuel & power Coal, water & gas

Amt.

Particulars
By Sales Less: Returns By Closing Stock By Gross Loss c/d*

Amt.

Depreciation

Consumable Store

Factory Rent, Rates,

and Taxes Foreman/ Works Managers Salary To Gross Profit c/d*

Profit & Loss Account

It is prepared to know the net loss of business during a particular period. Every businessman has to spend on expenses other than on manufacture or purchase of goods which are called indirect expenses. There can be other incomes except sales. So gross profit or loss is adjusted keeping in view these indirect expenses and other incomes to find out net profit or net loss.

Proforma of Profit & Loss Account

Particulars Amt To Gross Loss b/d To Salaries & wages To Administrative Charges To Carriage Inward To Freight Inward To Selling & Distribution expenses To Financial Charges Particulars Amt By Gross Profit b/d By other Incomes By B/D Recovered By Interest/Commission/ Rent By Net Loss (transferred to capital account)

To Depreciation & Provisions To Abnormal Losses To Net Profit (transferred to Capital Account)

Balance Sheet
Balance Sheet is a component of financial statements which shows balances of capital, liabilities & assets. All nominal accounts are closed by transferring these to Trading & Profit & Loss Account. Only personal & real accounts are left. Balance Sheet is the final phase in accounting cycle. It is a mirror which reflects the true position of the assets & liabities of the business on a particular date. A statement of financial position of economic unit disclosing as at a given moment of time its assets, liabilities & ownership equities. Eric L.kohler

Balance Sheet as on

Liabilities Capital Add: Net Profit Less: Drawings Fixed Liabilities: Long term loan Public deposits Current Liabilities: Unexpired Income Short Term Loans Trade Creditors Bank Overdraft

Amt

Assets Amt Fixed Assets: Goodwill Land and Buildings Plant & Machinery Motor Vehicles Furniture Patents & Trade Marks Live Stock Loose Tools Investments

Bill Payable Outstanding Expenses

Current Assets: Closing Stock Prepaid Expenses Accrued Income Debtors Bill Receivable Cash at Bank Cash in hand

ADJUSTMENTS
CLOSING STOCK The unsold goods lying in store at the end of accounting year. Treatment: Stock a/c Dr. To Trading a/c Two fold effect of adjustment will be :-

1) Show on Credit side of the Trading

account 2) On asset side of Balance Sheet

OUTSTANDING EXPENSES
Those expenses which have been incurred & not yet paid.
Treatment: Expenses a/c Dr To outstanding expenses Two fold effect: 1.Will be shown on debit side of trading & profit & loss a/c by way of addition to particular expense. 2. Will be shown on liabities side of Balance Sheet.

PREPAID EXPENSES
Those expenses which have been paid in advance i.e., whose benefit will be available in future is called prepaid expenses. Treatment:
Prepaid Expenses a/c Dr To Expenses a/c Two fold effect: 1.Will be shown in profit & loss a/c by way deduction from particular expense. 2. Will be shown on asset side of Balance Sheet.

ACCRUED INCOME
That income which has been earned but not received during the accounting year is called accrued income. Treatment:
Accrued Income a/c Dr To Income a/c Two fold effect: 1.Will be shown on credit side of P & L a/c 2. Will be shown on asset side of Balance Sheet

INCOME RECEIVED IN ADVANCE

Income received but not earned during accounting year is called income received in advance. Treatment:
Income a/c Dr To Income Received in advance Two fold effect: 1.Will be shown on credit side of P & L a/c by the way of deduction from particular income. 2. Will be shown on liabilities side of Balance Sheet.

DEPRECIATION
Depreciation is the reduction in the value of fixed asset due to its use, wear & tear. Treatment: Depreciation a/c Dr
To Asset a/c

Two fold effect:

1.Is shown on debit side of P & L a/c

2.Is shown on the Asset side of the Balance Sheet by way of deduction from value of concerned asset

To see whether the business is really earning profit or not ,interest on capital at a certain rate is provided. Treatment : Interest on capital A/c To capital A/c TWO FOLD EFFECT : 1.It will be shown on debit side of Profit and Loss A/c 2.Shown on liabilities side of Balance Sheet by way of addition to the capital.

INTEREST ON CAPITAL

INTEREST ON DRAWINGS
Interest on drawings is charged from proprietor ,as drawings reduce capital. Treatment: Drawings A/c To Interest on Drawings A/c Two fold effect will be: 1.It will be shown on credit side of Profit and Loss Account. 2.On liabilities side of Balance Sheet by way of addition to the drawings which are ultimately deducted from the capital.

BAD DEBTS
Debts which are definitely irrecoverable are called Bad Debts. Treatment:
Bad Debts A/c Dr

To Sundry Debtors a/c

Two fold effect:

1. Is shown on debit side of P & L a/c.

2. 2. Is shown on assets side of Balance Sheet by way of deduction from Sundry Debtors.

PROVISION FOR DOUBTFUL DEBTS

It is a provision created to cover any possible loss on account of bad-debts likely to occur in future. Treatment: Profit and Loss A/c To Provision for Doubtful Debts A/c Two effected accounts will be: 1.On debit side of Profit and Loss A/c or by way of addition to Bad Debts. 2.Shown on assets side of Balance Sheet by way of deduction from Sundry Debtors (deducting further bad debts if any).

PROVISION FOR DISCOUNT ON DEBTORS

If sales are made by the merchant on condition that if the amount of sales is paid within a certain period , he will allow a certain percentage of discount . Treatment : Profit and Loss A/c To Provision for Discount on Debtors A/c Two-fold effect will be: 1.Shown on debit side of Profit and Loss A/c 2.Shown by way of deduction from Sundry Debtors (after deduction of further bad debts and provision for doubtful debts) on assets side of Balance Sheet.

LOSS OF STOCK BY FIRE

Loss of stock may occur due to fire. The position of business may be:

a) All the stock is fully insured. b) The stock is partly insured. c) The stock is not insured at all.

a) IF THE STOCK IS FULLY INSURED

The whole loss will be claimed from the insurance company. Entry:Insurance Co. A/c Dr. To Trading A/c

Effect:1.It will be shown on credit side of Trading A/c. 2.It is shown on Assets Side of Balance Sheet.

b) IF STOCK IS PARTLY INSURED

The loss of stock covered by insurance policy will be claimed from the insurance company and the rest of amount will be loss for the business. Entry : Insurance Co. A/c Dr. Profit & Loss A/c Dr. To Trading A/c Effect of this entry: 1.Shown on credit side of Trading A/c with the value of stock & shown on debit side of P& L A/c for that part of the stock which is not insured. 2.Loss of stock Fire is shown on asset side of the Balance sheet which amount is to be realised from the insurance company.

c) IF STOCK IS NOT INSURED

Whole loss will be borne by the firm.

Entry:- Profit & Loss A/c Dr. To Trading A/c

Effect of this entry :1.It is shown on the credit side of Trading A/c. 2.It is shown on the debit side of P&L A/c

RESERVE FUND
Reserve is created out of profit & Loss A/c and thus is an appropriation of net profit for strengthening the financial position of the business. Treatment : Profit & Loss A/c Dr. To Reserve Fund A/c Two fold effect will be: 1.It is shown on debit side of P&L A/c. 2.It shown on the liabilities side of Balance.

GOOD DISTRIBUTED AS FREE SAMPLES.

To promote the sale of goods, some of the produced goods are distributed as free samples. Treatment: Advertisement A/c Dr. To Purchase A/c

Two fold effect: 1.Its is deducted from purchases . 2.It is shown on debit side of P&L A/c

EXAMPLE
M gives the following trial balance as on 31st March ,2010
Dr.
Plant &machinery Fixture & fittings (for office) Stock as on April 1, 2009: Raw materials Finished Goods Purchases Wages Other manufacturing expenses Office expenses Sundry expenses Cash at bank Patents Selling expenses 60000 2400 capital Ms currents A/c Sundry creditors 16300 25400 93100 51300 16200 18700 26000 6600 18000 15000 Loan at 18% from Indian Bank Sales Sale of scrap 20000 250600 3600

Cr.
50000 2500 22300

On 31st march ,2010 the stock of raw material was 13,300. deprecation provided by M is 15 % on Plant and Machinery and 10% on fixtures & fittings (on book value). Patents have two more years to run and concern a vital production process .Manufactured goods were transferred to selling department at a value of Rs. 2,00,000. The value of finished goods (at transfer price ) on hand on 31st March ,2010 was Rs.30,000; the value of the finished goods as on April 1,2009 was at cost to M. Draw the Manufacturing, trading & P&L a/c for 200910 and the Balance Sheet of M as at the end of the year.

MANUFACTURING ,TRADING AND PROFIT AND LOSS ACOOUNT OF M for the year ending 31st March ,2010
To raw material consumed: Rs. Opening stock 16,300 Add: Purchases 93,100 1,09400 Less: Closing Stock 13,300 96,100 To wages To Manufacturing Expenses 51,300 16,200 9,000 6,000 1,78,600 3,600 1,75,000 By Trading A/c (Transfer) 2,00,000

To Depreciation on Plant & machinery(15% on Rs 60,000)

To Depreciation on Patents(1/3 of Rs.18,000)

Less: Sale of Scrap Cost of Goods Produced To profit transferred to P&L a/c (12.5% of Transfer Price i.e., Rs.25,000 X 100 ) Rs. 2,00,000

25,000

To opening stock of finished Goods To value of goods manufactured transferred from manufacturing a/c To gross Profit c/d to profit & Loss A/c

25,600

By Sales By Closing Stock Of finished Goods

2,50,600 30,000

2,00,000 55,200

2,80,600
To office Expenses To Depreciation on fixtures & fittings To selling expenses To Interest on Loan from Indian Bank(18% on Rs 20000) To stock reserve (12.5% on Rs.30,000 Closing Stock of Finished Goods) To Net Profit Transferred to Ms Current A/c 18,700 240 15,000 3,600 By Gross Profit b/d By Profit transferred from Manufacturing a/c

2,80,000
55,200 25,000

3,750 38,910 80,200 80,200

BALANCE SHEET M as on 31st March ,2010

Sundry creditors Loan at 18%from Indian Bank 20,000 Add: Interest outstanding for 1 year @18% 3,600 Ms current Account : Balance as on 1-4-2009 2,500 Add: Net Profit 38,910 Capital 41,410 50,000 22,300 Cash at the bank Sundry debtors Closing stock of raw materials Closing stock of finished goods 30,000 Less: Reserve @12.5% to bring goods to cost value 3,750 Patents Less: written off Furniture & fittings Less: 10% Depreciation Plant & Machinery Less: 15% Depreciation 18,000 6,000 12,000 2,400 240 2,160 60,000 9,000 51,000 6,600 26,000 13,300

23,600

26,250

1,37,310

1,37,310