Besides the four illustrations given above, there are many other accounts requiring the same kind of adjustment entries. In certain special cases it may be necessary to make adjustments on both sides, as for example in a general expense account or in a mixed interest account showing both interest income and interest expense. For illustration a mixed interest account is shown. The debit opening item of $100 in the new section of the account represents an asset, an interest claim against outsiders, while the credit opening item of $50 represents the liability to others for interest due them but not yet paid. For the sake of accuracy and clarity, however, the better bookkeeping practice is to keep separate accounts for Interest Income and Interest Cost.
| Interest | |||
| 19— | 19— | ||
| June 30 (Paid) | 400.00 | June 30 (Received) | 500.00 |
| (Unpaid) | 50.00 | (Accrued, due us) | 100.00 |
| Profit and Loss | 150.00 | ||
| 600.00 | 600.00 | ||
| June 30 (Accrued) | 100.00 | June 30 (Unpaid) | 50.00 |
Summarizing the Ledger—The Profit and Loss Account.—After all the types of adjustments have been made, the accounts in the ledger are restored to their fundamental classifications, namely, assets, liabilities, and proprietorship. There is now no intermixture of these basic elements. The proprietorship group of accounts shows both the vested proprietorship, that is, the capital at the beginning of the period, and the temporary proprietorship, that is, the increases and decreases (as indicated by the income and expense accounts) which have taken place during the current period.
At the close of the fiscal period, when the temporary proprietorship accounts have served their purpose by showing the day-to-day changes in proprietorship and the results must be summed up, these accounts are closed for the current period so as to keep the records separate from those of the next period. For the purpose of summarizing the profit and loss group of accounts, an account called Profit and Loss is opened in the ledger and to it the balances of all temporary proprietorship accounts are transferred.
The Profit and Loss account in the ledger must not be confused with the formal statement of profit and loss, made up outside the ledger just as is the balance sheet. On the credit side of Profit and Loss will appear all credit or income account balances, and on the debit side will appear all debit or expense account balances. Accordingly, if the balance of the Profit and Loss account is a credit balance, it shows a net profit for the period; if a debit balance, it shows a net loss for the period.
The net profit or net loss shown by the Profit and Loss account represents either an increase or decrease in proprietorship, and as such is transferred to the proprietor’s personal account. As explained in [Chapter XII], this account usually shows his drawings during the period against these profits as they were assumed to be accruing. The personal account thus indicates whether the amount which he has drawn out is larger or smaller than the net profits as determined by the Profit and Loss account. If his profits are larger than his drawings, his capital has been increased by the amount of the credit balance in his personal account and the transfer of this balance to the credit side of his capital account will then show the total net worth of the business. If his drawings are larger than the profits, there is a decrease in capital, as shown by the debit balance of his personal account, and the transfer of this balance to the debit side of the capital account reduces the former capital amount.
The summarization of results at the close of a period is called “closing the ledger.” The procedure consists, first, in a transfer, i.e., in a closing out, of all the temporary proprietorship accounts to the Profit and Loss account; second, in the transfer of the balance of this account to the owner’s personal account; and third, in the transfer of the balance of the personal account to the owner’s capital account. After all temporary proprietorship accounts, the Profit and Loss account, and the owner’s personal account have been closed, the only accounts remaining open on the ledger are those showing either assets, liabilities, or capital. A formal statement of the balances of these accounts constitutes the balance sheet. The accounts through which the income and expense records of the business are closed, summarized, and transferred to the vested proprietorship account, are shown below, with typical entries:
| Profit and Loss | |||
| 19— | 19— | ||
| June 30 Purchases (Cost of Goods Sold) | 15,000.00 | June 30 Sales (Net income from sales) | 30,000.00 |
| Sales Salaries | 5,000.00 | ||
| Delivery Expense | 500.00 | ||
| Office Salaries | 2,400.00 | ||
| Supplies, Postage, etc. | 200.00 | ||
| Insurance | 150.00 | ||
| Bad Debts | 500.00 | ||
| Interest | 150.00 | ||
| Depreciation | 200.00 | ||
| John Doe, Personal (Balance) | 5,900.00 | ||
| 30,000.00 | 30,000.00 | ||
| John Doe, Personal | |||
| 19— | 19— | ||
| Jan. 5 Cash | 300.00 | June 30 Profit and Loss | |
| Feb. 10 ” | 250.00 | (Net profit) | 5,900.00 |
| Mar. 3 ” | 150.00 | ||
| Apr. 1 ” | 200.00 | ||
| May 10 ” | 300.00 | ||
| June 3 ” | 250.00 | ||
| 30 John Doe, Capital | |||
| (Balance) | 4,450.00 | ||
| 5,900.00 | 5,900.00 | ||
| John Doe, Capital | |||
| 19— | |||
| Jan. 1 | 75,000.00 | ||
| June 30 John Doe Personal | |||
| (Net increase in proprietorship) | 4,450.00 | ||
CHAPTER XVI
SOURCES OF DATA FOR THE LEDGER
Insufficiency of the Ledger Record.—In an earlier chapter a business transaction was defined as an exchange of values, and the ledger as the book in which transactions are grouped under predetermined titles or names. Thus, all transactions relating to machinery are grouped under the title “Machinery”; those relating to cash under the title of “Cash”; those to purchases under the name “Purchases”; etc. Even in a small business the ledger may contain a large number of accounts, all necessary to give a clear-cut presentation of the volume and significance of business transactions.