The Profit and Loss Account.—In posting the closing journal entries to the Profit and Loss account in the ledger, usually only the group totals as indicated by the entry will appear. In small concerns where expenses and income are not classified in much detail, the individual items composing the group total are often shown. These items are, of course, the same as appear in the part of the journal entry which is contra to the group total charged or credited to Profit and Loss. The ledger Profit and Loss account for the illustration will appear as follows when completely posted:
Form 28. Profit and Loss Account in Ledger
Profit and Loss Not an Account for Current Entry.—It should be kept clearly in mind that the process of closing the books is merely a method or device by which the transactions for the year are summarized and the net result determined. This net result, whether a profit or a loss, belongs to the proprietor and must ultimately be shown in his account. It is, therefore, manifest that the Profit and Loss account is only a summary account and should never be used for current entry. It is the means by which the temporary proprietorship accounts are summarized and the medium through which the net result is cleared into some vested proprietorship account or accounts.
Effect of Closing the Ledger.—The transfer of net profit to a vested proprietorship account completes the work of closing the ledger, all temporary proprietorship accounts for the current period being closed out. All open balances now shown on the ledger constitute either assets, liabilities, or vested proprietorship. A post-closing trial balance contains only the accounts shown on the corresponding balance sheet. The income and expense accounts, having been cleared of their current record, are prepared to receive the record of the next period. The business cycle for this particular business has been completed and its correct history recorded.
CHAPTER XXIX
TYPES OF ACCOUNTING RECORDS AND
THEIR DEVELOPMENT
Evolution of Analytical Journals.—Though the only books absolutely necessary for an accounting record under the double-entry method are the journal and the ledger, even the small business finds some subdivision of the journals advantageous, and so makes use of sales, purchases, and cash receipts and cash disbursements journals. As a business grows and its transactions increase in volume and complexity, further subdivision is needed. When the scope of its organization becomes too great for a personal oversight, a method or system must be devised for keeping the proprietor or manager in close touch with the various departments and lines of business endeavor. This is accomplished by means of reports from the accounting department, which exists largely for the purpose of furnishing this kind of information.
Principle to be Followed in Securing Analysis.—In an earlier chapter it was laid down as a fundamental principle that the information desired by the management should be furnished from analytical records made at the time of original entry, rather than by analyzing a composite record at the time the information is wanted. Such analytical records make possible a quicker and more up-to-date report to the management, and they save labor in securing the information by making the analysis at the time of record when all the facts related to it are readily available.
Types of Sales Journals and Methods of Handling.—The first step in the analysis of business transactions is the subdivision of the general journal into separate journals, and this analysis is carried still further by the use of columnar journal records. Reference has already been made, in [Chapter XVIII], to the use of additional columns in the sales and purchase journals. Here a brief sketch will be given of the methods of recording sales in various kinds of sales journals.
1. The earliest type of sales journal, not often used today, consisted of a letter impression book containing the press copy of invoices sent to customers, with columns for the extension of the amounts and sometimes with additional columns for purposes of analysis. Such a journal has the advantage that the original entry is an exact copy of the invoice. Oftentimes, however, the impression is poor and nearly or quite illegible; it takes much room; the detail shown is not often used; and it increases the work of making and handling the record.