Chapter Xxvii to Which Reference Should Be Made. in Connection With the

work sheet it was stated that the adjustment columns of the work sheet are used as a guide to making the adjusting entries. As to sequence in the journal, these follow immediately, without break, the last current entry for the month. The adjusting entries for U. R. Smart are:

Purchases 30,000.00 Merchandise Inventory 30,000.00 Merchandise Inventory 26,500.00 Purchases 26,500.00 Depreciation 3,630.00 Depreciation Reserve Office Furniture and Fixtures 280.00 Depreciation Reserve Store Furniture and Fixtures 1,200.00 Depreciation Reserve Delivery Equipment 750.00 Depreciation Reserve Buildings 1,400.00 Bad Debts 482.88 Reserve for Doubtful Accounts 482.88 Interest Income (Accrued) 150.00 Interest Income 150.00 Insurance (Deferred) 250.00 Insurance 250.00 Advertising (Deferred) 300.00 Advertising 300.00 Printing and Stationery (Deferred) 150.00 Printing and Stationery 150.00 Selling Supplies and Expense (Deferred) 200.00 Selling Supplies and Expense 200.00 Taxes 340.00 Taxes (Accrued) 340.00 Salesmen’s Salaries 175.00 Salesmen’s Salaries (Accrued) 175.00 Interest Cost 50.00 Interest Cost (Accrued) 50.00 Special Police on Strike Duty 150.00 Special Police on Strike Duty (Accrued) 150.00 Office Salaries 100.00 Office Salaries (Accrued) 100.00 Sub-Rentals Income 50.00 Sub-Rentals Income (Deferred) 50.00

=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.

=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:

=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.