Purpose of Summarizing.—After the adjusting entries are posted, the ledger reflects the true financial condition as of the date of these entries. However, at this stage the information contained in the ledger is usually scattered over a large number of accounts. To obtain a concise view of the results of the business, it is necessary to summarize this information. The Profit and Loss account is the means by which the temporary proprietorship accounts are summarized and the net results as to profits or losses are indicated.
In this connection it will be remembered that the adjusting entries have already effected a separation of the elements of the mixed accounts, so that the temporary proprietorship items—expenses and income—applicable to the current period are now separately shown. The transfer of these temporary proprietorship items to the vested proprietorship accounts constitutes the work of closing. The use of the Profit and Loss account as a place of summary—a clearing house—through which the net result can be passed on or transferred to the vested proprietorship accounts, constitutes a part of the method or technique of closing.
The Closing Entries.—The student is already familiar with the principles of debit and credit involved in making the closing entries. As indicated above, these are transfer entries and merely effect a transfer of all temporary proprietorship items to the Profit and Loss account for summary there and for the transfer of the net result to some vested proprietorship account or accounts. Like all other entries, these are made first in the journal and are posted from there to the ledger. The current sections of the various expense and income accounts are then ruled off and the ledger is said to be “closed.”
Method of Closing the Books.—As explained on [page 129], the Profit and Loss account in the ledger is used for summarizing the temporary proprietorship accounts before transferring them, i.e., their net result, to the vested proprietorship accounts. The use of Purchases and Sales accounts for a partial summarization of the various merchandise accounts has also been explained. After this partial summarization has been made, the debit balance of the Purchases account, showing cost of goods sold, is transferred to the Profit and Loss account; and similarly, the credit balance of the Sales account, representing net sales, is transferred to the Profit and Loss account. Profit and Loss then shows on the credit side net sales and on the debit cost of goods sold, the difference being the income portion, i.e., the gross profit of the merchandising activities for the period. If it is desired to show on the face of the account the actual figure of gross profit, the Profit and Loss account may be balanced at this stage, though this is not usually done. The rest of the work of summarization is accomplished directly through the Profit and Loss account.
Closing Entries Illustrated.—The formal journal entries necessary to effect this summarization in the ledger are given below, being based on the illustration used for the work sheet and being made up directly from the various sections of the formal profit and loss statement shown on [page 234]. The way in which this is done should be carefully noted. As to their sequence in the journal, these closing entries will, of course, immediately follow the formal adjusting entries illustrated above.
| Purchases | 1,350.00 | ||
| In-Freight and Cartage | 1,350.00 | ||
| Purchase Returns and Allowance | 5,400.00 | ||
| Purchases | 5,400.00 | ||
| Profit and Loss | 134,450.00 | ||
| Purchases | 134,450.00 | ||
| Sales | 1,850.00 | ||
| Sales Returns and Allowances | 1,850.00 | ||
| Sales | 193,150.00 | ||
| Profit and Loss | 193,150.00 | ||
| Profit and Loss | 25,225.00 | ||
| Salesmen’s Salaries | 13,675.00 | ||
| Selling Supplies and Expense | 1,400.00 | ||
| Advertising | 4,500.00 | ||
| Out-Freight | 400.00 | ||
| Delivery Expense | 3,300.00 | ||
| Depreciation | 1,950.00 | ||
| Store Furniture and Fixtures | 1,200.00 | ||
| Delivery Equipment | 750.00 | ||
| Profit and Loss | 18,560.00 | ||
| Office Salaries | 5,100.00 | ||
| Office Expense | 4,500.00 | ||
| General Expense | 2,000.00 | ||
| Printing and Stationery | 600.00 | ||
| Taxes | 3,180.00 | ||
| Insurance | 1,500.00 | ||
| Depreciation | 1,680.00 | ||
| Office Furniture and Fixtures | 280.00 | ||
| Building | 1,400.00 | ||
| Profit and Loss | 2,367.88 | ||
| Interest Cost | 950.00 | ||
| Sales Discount | 850.00 | ||
| Bad Debts | 482.88 | ||
| Collection and Exchange | 85.00 | ||
| Interest Income | 1,650.00 | ||
| Purchase Discount | 1,300.00 | ||
| Profit and Loss | 2,950.00 | ||
| Profit and Loss | 1,350.00 | ||
| Special Police on Strike Duty | 1,350.00 | ||
| Sub-Rentals Income | 600.00 | ||
| Profit and Loss | 600.00 | ||
| Profit and Loss | 14,747.12 | ||
| U. R. Smart, Personal | 14,747.12 | ||
| U. R. Smart, Personal | 4,247.12 | ||
| U. R. Smart, Capital | 4,247.12 | ||
It will be noted that after the net sales and cost of goods sold are transferred to the Profit and Loss account, all expenses directly connected with sales, such as Salesmen’s Salaries, Advertising, Delivery Expense, Depreciation of Delivery Equipment, of Store Furniture and Fixtures, and similar items, are closed into the Profit and Loss account.
The groups of accounts closed next are those covering General Administrative Expenses, Financial Management Expenses, Financial Management Income, Non-Operating Expense, and Non-Operating Income. It will be noticed that the order of closing follows the order in which the same items appear in the profit and loss statement.
The Profit and Loss account now shows on the credit side the items of income and on the debit side the costs and expenses applicable to the current period. Its balance then gives the net profit (or loss) covering the period’s transactions.
Throughout the period, as the profit accrues, the proprietor may have drawn against it for personal use, as shown in his Personal account. To show the amount of profit remaining in the business, the balance of the Profit and Loss account is transferred to the Personal account, the balance of which then gives the amount of undrawn or overdrawn profit. The balance of the Personal account is closed into the Capital account, the credit balance of which then represents the net worth of the business at the end of this period and at the commencement of the next.