Closing Time
What type of accounts must be closed at the end of the reporting period?
Revenue and expense accounts.
What does P&L Summary stand for?
Profit and Loss Summary.
Net profit increases which accounting element?
Owner’s Equity.
What accounting report shows revenues, expenses and net profit or loss?
Income Statement.
Cartage inwards is classified under which section of the Income Statement?
Cost of Goods Sold.
Why are revenue and expense accounts closed at the end of the period?
To return them to zero for the next reporting period.
What is the purpose of the Profit and Loss Summary account?
To summarise revenues and expenses to determine net profit or loss.
What account is net profit transferred to after the P&L Summary is closed?
Capital account.
What is the formula for net profit?
Revenues earned minus expenses incurred.
Why is cartage outwards not included in Cost of Goods Sold?
It occurs after the sale when delivering goods to customers, so it is an other expense.
Which side are expense accounts closed on?
Credit side.
Which side are revenue accounts closed on when transferred to P&L Summary?
Debit side.
Give the general journal entry to transfer net profit of $8,000 to Capital.
Debit P&L Summary $8,000; Credit Capital $8,000.
Name two qualitative characteristics linked to the Income Statement.
Relevance and understandability.
Discount revenue is reported under which section of the Income Statement?
Other revenue.
Sales Returns acts like what type of account when closing the ledger?
A negative revenue account.
If total revenues are $90,000 and total expenses are $72,000, what balance is transferred from P&L Summary?
Net profit of $18,000.
Give the general journal entry for a net loss of $6,500.
Debit Capital $6,500; Credit P&L Summary $6,500.
Explain how the period assumption links to the Income Statement.
It requires revenues and expenses to be measured for a specific reporting period so profit can be determined and compared.
Why are discount revenue and discount expense not included in Gross Profit?
They are not directly related to buying or selling inventory and would distort gross profit.
Explain why closing the ledger supports the going concern assumption.
Revenue and expense accounts are closed for the current period while the business continues into the next period, with profit/loss transferred to Capital.
A business has Sales $75,000, Sales Returns $3,000, Expenses $48,000. What is net profit?
$24,000. Calculation: $75,000 - $3,000 - $48,000.
Explain why drawings must be closed to Capital.
Drawings decrease owner’s equity and must be transferred to Capital to update the owner’s investment in the business.
Explain how the accrual accounting assumption is applied in the Income Statement.
Revenues earned are matched against expenses incurred in the same reporting period to calculate net profit or loss.
Inventory sold cost $2,300, packaging was $690, cartage inwards was $50 and cartage outwards was $2,300. What amount is included in Cost of Goods Sold?
$3,040. Cartage outwards is excluded because it is an other expense.