Chapter 9Determining Profit or

Loss

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Determining Profit or Loss

Profit is calculated by matching revenues earned in a Reporting Period against expenses incurred in the same Reporting Period

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Closing the Ledger

Closing the ledger means transferring balances from the revenue and expense ledger accounts to the Profit and Loss (P&L) Summary account

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Closing the Ledger

Closing the ledger is necessary to: •calculate profit for the current Reporting Period •reset the revenue and expense accounts to zero in readiness for the next Reporting Period

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Closing Entries

• To transfer revenue or expense accounts to the Profit and Loss Summary account, it is necessary to make each balance equal zero

• This means debiting the revenue account and crediting the expense account

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Closing Entries

• Revenue and expense accounts must be closed to the Profit and Loss Summary account at the end of the Reporting Period

• The Profit and Loss Summary account is then closed to the Capital account

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Transferring Drawings

• The Drawings account is transferred to the Capital account at the end of the Reporting Period

• The transfer method is the same as for the Profit and Loss Summary account

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The Income Statement

The Income Statement aids decision-making by•detailing the revenues earned and expenses incurred during the Reporting Period•showing both Gross Profit and Net Profit

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If the Income Statement and Profit and Loss Summary account have been properly calculated, they should show the same Net Profit figure

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The Income Statement