Accounting & Financial Analysis 111 Lecture 5 Closing General Ledger entries, Trading Account – Gross Profit Profit & Loss Account – Retained Profit Closing General Ledger entries, Trading Account – Gross Profit Profit & Loss Account – Retained Profit

General Ledger The general ledger is divided into two sections: Nominal Ledger Nominal Ledger : Dedicated to Income and Expenses Proprietary Ledger Proprietary Ledger : Dedicated to Assets, Liabilities and Owner's Equity. (Accounting equation) The general ledger is divided into two sections: Nominal Ledger Nominal Ledger : Dedicated to Income and Expenses Proprietary Ledger Proprietary Ledger : Dedicated to Assets, Liabilities and Owner's Equity. (Accounting equation)

Accounting equation Assets = Liabilities + Owner Equity OR Owner Equity = Assets – Liabilities Therefore Owner's Equity is the value of the business (what the business is worth) and this belongs to the owner of the business Assets = Liabilities + Owner Equity OR Owner Equity = Assets – Liabilities Therefore Owner's Equity is the value of the business (what the business is worth) and this belongs to the owner of the business

What is Owner Equity ? capital It is the capital that the owner originally put into the business Plus any profits Plus any profits that the business made over it's trading life which the owner did not yet take. Retained Profits (left in the business for expansion) - Known as Retained Profits capital It is the capital that the owner originally put into the business Plus any profits Plus any profits that the business made over it's trading life which the owner did not yet take. Retained Profits (left in the business for expansion) - Known as Retained Profits

How do we know what profits the business made during the year? (Income - Expenses = Profit) We know this from the Nominal Ledger (Income - Expenses = Profit) At the end of the trading year no more transactions will go into the nominal ledger. A new year begins, and a new nominal ledger is opened. (Income - Expenses = Profit) We know this from the Nominal Ledger (Income - Expenses = Profit) At the end of the trading year no more transactions will go into the nominal ledger. A new year begins, and a new nominal ledger is opened.

Nominal Ledger after all adjustment journals have been processed It is therefore logical that at the end of the year - after all adjustment journals have been processed – all balances transferred to a Profit & Loss account the nominal ledger should be closed and all balances transferred to a Profit & Loss account in order to establish the profit for the year. That profit is then transferred to the Retained Profit account That profit is then transferred to the Retained Profit account in the section of Owner's Equity in the balance sheet. after all adjustment journals have been processed It is therefore logical that at the end of the year - after all adjustment journals have been processed – all balances transferred to a Profit & Loss account the nominal ledger should be closed and all balances transferred to a Profit & Loss account in order to establish the profit for the year. That profit is then transferred to the Retained Profit account That profit is then transferred to the Retained Profit account in the section of Owner's Equity in the balance sheet.

The End of Year Process In the general ledger we need to open two accounts (at the end of the year) Trading account A Trading account: (Income - Cost of Goods sold = Gross Profit) Profit & Loss account A Profit & Loss account: (Gross Profit + Other Income - Expenses = Net Profit) At this stage there are no transactions in either of these accounts. In the general ledger we need to open two accounts (at the end of the year) Trading account A Trading account: (Income - Cost of Goods sold = Gross Profit) Profit & Loss account A Profit & Loss account: (Gross Profit + Other Income - Expenses = Net Profit) At this stage there are no transactions in either of these accounts.

Trial Balance Trial Balance However, we have produced a Trial Balance showing the balances of all the general ledger accounts (Nominal & Proprietary Ledgers) If each ledger was kept separately (as should have been) the nominal ledger balances would be at the top of the Trial Balance. Draw an imaginary line to separate the Nominal Ledger accounts from the Proprietary Ledger accounts. Trial Balance However, we have produced a Trial Balance showing the balances of all the general ledger accounts (Nominal & Proprietary Ledgers) If each ledger was kept separately (as should have been) the nominal ledger balances would be at the top of the Trial Balance. Draw an imaginary line to separate the Nominal Ledger accounts from the Proprietary Ledger accounts.

Close off accounts All the Nominal Ledger accounts have to be closed (balanced off) and transferred to either Trading account the Trading account or Profit & Loss account the Profit & Loss account. All the Nominal Ledger accounts have to be closed (balanced off) and transferred to either Trading account the Trading account or Profit & Loss account the Profit & Loss account.

The purpose of the Trading account to establish the difference between the income from the sale of trading goods and all costs incurred in obtaining and handling the goods sold. This is were the purchases account is adjusted for closing inventory on hand. Gross Profit The balance on the trading account is known as the Gross Profit. to establish the difference between the income from the sale of trading goods and all costs incurred in obtaining and handling the goods sold. This is were the purchases account is adjusted for closing inventory on hand. Gross Profit The balance on the trading account is known as the Gross Profit.

Gross Profit Profit & Loss account Gross Profit is then transferred to the Profit & Loss account together with all the remaining balances of the Nominal Ledger. The purpose of the Profit & Loss account is to establish the overall profit or loss of the business. Net Profit The balance on the Profit & Loss account is know as the Net Profit. Profit & Loss account Gross Profit is then transferred to the Profit & Loss account together with all the remaining balances of the Nominal Ledger. The purpose of the Profit & Loss account is to establish the overall profit or loss of the business. Net Profit The balance on the Profit & Loss account is know as the Net Profit.

Gross Profit and Net Profit Less Sales Income Less Cost of goods sold Equals Gross Profit Add Less Equals Gross Profit Add Other income Less Operating expenses (selling, administration, financial) Equals Net profit ( or loss) Less Sales Income Less Cost of goods sold Equals Gross Profit Add Less Equals Gross Profit Add Other income Less Operating expenses (selling, administration, financial) Equals Net profit ( or loss)

PRACTICE ACTIVITY! Class Exercise 5 Do it manually or use MYOB Class Exercise 5 Do it manually or use MYOB