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(L) Chapter 11 Preparation of Financial Statements - Closing Entries
(L) Chapter 11 Preparation of Financial Statements - Closing Entries
Closing entries
After all the necessary year-end adjustments, the final step is to close the General Ledger.
All the income and expenses accounts in the General Ledger are closed off by transferring the
total balance to the Statement of Profit or Loss (SPL) at the end of the accounting period to
calculate the profit/(loss) for the period. Nothing is brought down to the start of the next
accounting period. (Income and Expenses – charged to SPL)
Example:
Sales Account
2017 RM 2017 RM
Dec3 Dec3 Trade
SPL 65,000 50,000
1 1 Receivables
31 Bank 15,000
65,000 65,000
All the assets, liabilities and equity accounts in the General Ledger are carried down (c/d) at
the end of the accounting period. (Assets, liabilities and capital – balance c/d).
3) The capital account must transfer from drawings account and net profit from the Statement
of Profit or Loss before being closed.
Example:
150,000 150,000
2018
Jan 1 Bal b/d 150,000
30,000 30,000
2018
Jan 1 Bal b/d 30,000
Drawings Account
2017 RM 2017 RM
Dec3
Bank 3,000 Dec31 Capital 8,000
1
31 Purchases 5,000
8,000 8,000
Capital Account
2017 RM 2017 RM
Dec3
Drawings 8,000 Jan 1 Bal b/d 500,000
1
31 Bal c/d 514,000 Dec31 Net Profit 22,000
522,000 522,000
2018
Jan 1 Bal b/d 514,000
Statement of Financial Position (extract) as at 31 Dec 2017
RM RM RM
Non-current assets
Office equipment at cost 150,000
Less: Accumulated depreciation (30,000) 120,000
Current assets
Trade Receivables 75,000
Equity
Capital as at 1 Jan 2017 500,000
Add: Net Profit 22,000
522,000
Less: Drawings (8,000)
Capital as at 31 Dec 2017 514,000
Once the general ledger accounts have been closed and balanced off, a Trial Balance will
be prepared,
Chapter 11 followed
Preparation by the necessary
of Financial Statementsadjustments.
& Closing Thereafter,
Entries the financial
LTJ 2018statements 3
of the sole proprietor business will be prepared. (Trial balance will be discussed in
another topic). At this point of time, a trial balance will be provided but the students are
required to make the adjustments as per the additional information given.
Illustration 1:
Mr Bryant, a boutique retailer, provided the following balances that were extracted from his business
ledger as at 30 June 2017.
Additional information:
1. Closing inventories are valued at cost RM6,500 but the market value are RM7,900.
2. Salary RM1,500 not yet paid and prepaid rent was RM800.
3. Interest RM100 is not yet received and commission received in advance is RM150.
4. A Trade Receivable, Mr. G, with an outstanding debt of RM200 is to be written off as bad debts.
Allowance for doubtful debts is to be increased to RM500 as at 30 June 2017.
5. Depreciation to be provided as follows:
Motor vehicles 20% per annum, using the straight line method.
Furniture All furniture were acquired during the year, with useful life of 6 years and
nil scrap value.
Office equipment 25% per annum on cost.
Required:
(a) Prepare the Statement of Profit or Loss for Bryant for the year ended 30 June 2017.
(b) Prepare the Statement of Financial Position as at that date.
Solution (Illustration 1)
Bryant
Statement of Profit or Loss for the year ended 30 June 2017
RM RM RM
Sales 90,000
Less: Returns inwards (2,000)
Net Sales 88,000
Add: Income
Commission received (2,200 – 150) 2,050
Interest received (300 + 100) 400 2,450
38,650
Less: Expenditure
Chapter 11 Preparation of Financial Statements & Closing Entries LTJ 2018 5
Salaries (16,500 +1,500) 18,000
Carriage outwards 2,100
Office insurance 1,100
Rent (10,400 – 800) 9,600
Utilities 3,900
Bad debts 200
Doubtful debts (500 – 300) 200
Depn: motor vehicles (22,000 x 20%) 4,400
Depn: furniture (12,000 6) 2,000
Depn: office equipment (15,000 x 25%) 3,750 (45,250)
Net Loss (6,600)
Bryant
Statement of Financial Position as at 30 June 2017
RM RM RM
Non-current assets
Motor vehicles at cost 22,000
Less: Accumulated depreciation (4,400) 17,600
Furniture at cost 12,000
Less: Accumulated depreciation (2,000) 10,000
Office equipment at cost 15,000
Less: Accumulated depreciation (3,750) 11,250 38,850
Current assets
Inventories 6,500
Trade receivables (12,700 – 200) 12,500
Less: Allowance for doubtful debts (500) 12,000
Prepaid rent 800
Interest receivable 100
Fixed deposit 20,000
Cash 3,000 42,400
81,250
Equity
Capital as at 1 July 2016 74,000
Less: Net Loss (6,600)
67,400
Less: Drawings (2,300)
Capital as at 30 June 2017 65,100
Current liabilities
Trade payables 11,000
Accrued salary 1,500
Comm. received in advance 150
Bank overdraft 3,500 16,150
81,250
Illustration 2:
Herald Trading extracted the following balances from the business ledger as at 31 March 2018.
3. No record was made for the utilities bill of RM350 that was received, and insurance was paid for the
year ended 30 June 2018.
4. Commission RM400 has not yet been received and 14 months’ rental was received, which included
2 months’ deposits.
5. An additional amount that is due from Mr. T of RM200 is to be written off as bad debts. Allowance
for doubtful debts is to be provided at RM440 on 31 March 2018.
Required:
(a) Prepare the Statement of Profit or Loss of Herald Trading for the year ended 31 March 2016.
(b) Prepare the Statement of Financial Position as at that date.
Solution (Illustration 2)
Herald Trading
Statement of Profit or Loss for the year ended 31 March 2018
RM RM RM
Sales 97,300
Less: Returns inwards
Chapter 11 Preparation of Financial Statements & Closing (1,800)Entries LTJ 2018 7
Net Sales 95,500
Add: Income
Rent received (4,900 – 700) 4,200
Commission received (2,550 + 400) 2,950
Interest received 2,000 9,150
46,950
Less: Expenditure
Salaries (12,500 x 80%) 10,000
Interest 1,100
Insurance (1,200 – 300) 900
Utilities (3,600 + 350) 3,950
Bad debts (500 + 200) 700
Doubtful debts (440 – 250) 190
Depn: fixtures & fittings (20,000 x 20%) 4,000
Depn: motor vehicles (25,600 x 20%) 5,120 (25,960)
Net Profit 20,990
Herald Trading
Statement of Financial Position as at 31 March 2018
RM RM RM
Non-current assets
Premises 85,000
Fixtures & fittings at cost 20,000
Less: Acc. Depn. (4,000 + 4,000) (8,000) 12,000
Motor vehicles at cost 40,000
Less: Acc. Depn. (14,400 + 5,120) (19,520) 20,480 117,480
Current assets
Inventories 7,500
Trade receivables (11,200 - 200) 11,000
Less: Allowance for doubtful debts (440) 10,560
Prepaid insurance 300
Commission receivable 400
Bank 8,000
Cash 1,000 27,760
145,240
Equity
Capital as at 1 April 2017 110,000
Add: Net Profit 20,990
130,990
Less: Drawings (3,300)
Capital as at 31 March 2018 127,690
Chapter 11 Preparation of Financial Statements & Closing Entries LTJ 2018 8
Current liabilities
Trade payables 16,500
Accrued utilities 350
Rent received in advance 700 17,550
145,240
Illustration 3:
New World Enterprise extracted the following balances from the business ledgers as at 31 July 2017.
Additional information:
1. Closing inventories valued at cost RM17,700 but market value at RM19,900.
2. One third of the salaries was wages payment for warehouse employees. A quarter of carriage
expenses is to deliver goods to warehouse.
3. Utilities bill RM350 for July 2017 was paid twice, and insurance premium notice was received but
not yet paid for the year ended 31 July 2017 amounting to RM500.
5. An additional amount due from Ms. K RM600 is to be written off as bad debts. Allowance for
doubtful debts of RM1,400 is to be provided as at 31 July 2017.
Required:
(a) Prepare a Statement of Profit or Loss of New World Enterprise for the year ended 31 July 2017.
Add: Income
Discount received 1,320
Rent received (4,400 + 400) 4,800
Decrease in AFDD (2,000 – 1,400) 600 6,720
71,070
Less: Expenditure
Chapter 11 Preparation
Carriage 4)
outw. [(3,800 of Financial
x 3] Statements & Closing
2,850Entries LTJ 2018 10
Salaries [(21,000 3) x 2] 14,000
Discount allowed 2,100
Insurance (1,500 + 500) 2,000
Utilities (6,400 - 350) 6,050
Bad debts (1,300 + 600) 1,900
Depn: office equipment (30,000 x 25%) 7,500
Depn: motor vehicles (30,720 x 20%) 6,144
Depn: machinery (48,000 x 15% ) 7,200 (49,744)
Net Profit 21,326
Current assets
Inventories 17,700
Trade receivables (35,600 – 600) 35,000
Less: Allowance for doubtful debts (1,400) 33,600
Prepaid utilities 350
Rent receivable 400
Bank 22,000
Cash 8,000 82,050
162,426
Equity
Capital as at 1 August 2016 100,000
Add: Net Profit 21,326
121,326
Less: Drawings (15,700)
Capital as at 31 July 2017 105,626
Non-current liabilities
Loan 30,000
Current liabilities
Trade payables 26,300
Accrued insurance 500 26,800
162,426
Illustration 4:
Jojo started his business since 2015 and ends his accounting year at 31 August each year. The following
is his trial balance as at 31 August 2017.
Chapter
Trial 11 as
Balance Preparation
at 31 Augustof2017
Financial Statements & Closing Entries LTJ 2018 11
Debit Credit
RM RM
Purchases & Sales 18,000 30,000
Returns 100 150
Inventory as at 1 September 2016 6,500
Cash in hand 800
Cash at bank - 1,000
Stationery 580
Rent 3,600
Insurance 2,800
Advertising 2,300
Salary & wages 3,280
Administration expenses 2,100
Bad debts 560
Discounts 690 726
Capital 14,300
Trade receivables & Trade payables 5,280 4,080
Allowance for doubtful debts 350
Office equipment
- Cost 4,860
- Accumulated depreciation 1,460
Fixture & fittings
- Cost 880
- Accumulated depreciation 264
52,330 52,330
As at 31 August 2017, the following information is relevant:
1. Closing inventory was valued at cost RM10,000.
2. Proceeds from cash sales RM700 used to pay for house rental was not recorded.
4. Accruals of rent and advertising expenses are RM200 and RM180 respectively.
6. Out of the total stationery bought, RM180 is actually for Jojo’s personal use.
8. Office equipment is to be depreciated at 15% using the reducing balance method, whereas 10%
depreciation is to be provided for fixtures & fittings based on the straight-line method.
Required:
(a) Prepare the Statement of Profit or Loss for Jojo for the year ended 31 August 2017.
(14 marks)
(b) Prepare the Statement of Financial Position as at 31 August 2017.
(11 marks)
[Total: 25 marks]
Solution (Illustration 4)
Jojo
Statement of Profit or Loss for the year ended 31 August 2017
Chapter 11 Preparation of Financial StatementsRM & Closing RM Entries RM LTJ 2018 12
Sales (30,000 + 700) 30,700
Less: Returns inwards (100)
Net Sales 30,600
Add: Income
Discount received 726
16,976
Less: Expenditure
Stationery (580 - 180) 400
Rent (3,600 + 200) 3,800
Insurance (2,800 - 500) 2,300
Advertising (2,300 + 180) 2,480
Salary & wages (3,280 - 380) 2,900
Administration expenses 2,100
Discount allowed 690
Bad debts 560
Doubtful debts (500 - 350) 150
Depn: office equipt [(4,860 – 1,460) x 15%) 510
Depn: fix. & fittings (880 x 10%) 88 (15,978)
Net Profit 998
Jojo
Statement of Financial Position as at 31 August 2017
RM RM RM
Non-current assets
Office equipment at cost 4,860
Less: Acc. Depn. (1,460 + 510) (1,970) 2,890
Fixtures & fittings at cost 880
Less: Acc. Depn. (264 + 88) (352) 528
3,418
Current assets
Inventories 10,000
Trade receivables 5,280
Less: Allowance for doubtful debts (500) 4,780
Prepaid salary & wages 380
Prepaid insurance 500
Cash 800 16,460
19,878
Equity
Capital as at 1 September 2016 14,300
Add: Net Profit 998
15,298
Less: Drawings (880)
Capital as at 31 August 2017 14,418
Current liabilities
Trade payables 4,080
Chapter
Accrued 11 Preparation of Financial Statements & Closing
rent 200Entries LTJ 2018 13
Accrued advertising 180
Bank overdraft 1,000 5,460
19,878