Transferring Balances at the End of an Accounting Period (Cambridge International AS Accounting)

Transferring balances at the end of an accounting period

Which accounts do I need to transfer to the statement of profit or loss?

• The statement of profit or loss is part of the double entry system

  • It is used to calculate the profit or loss for the year

• Therefore, the balances for expenses and incomes are transferred to the statement of profit or loss

  • Including sales, purchases, sales returns, and purchases returns
  • Expenses are debited to the statement of profit or loss
  • Incomes are credited to the statement of profit or loss

• Balances on accounts for assets, liabilities and capital are not transferred to the statement of profit or loss

  • These do not directly affect the profit or loss

How do I transfer a balance on an account to the statement of profit or loss?

• The process is very similar to balancing an account at the end of a month

• The main difference is

  • The balance is not carried down to the next month
  • It is transferred to the statement of profit or loss

• The account should start the next accounting period with a zero balance

  • There are a few exceptions

    • Including accrued and prepaid expenses and income

• Here is an example of a wages account

  • The statement of profit or loss is being prepared for the year ending 31 May 2024

Wages Account

How do I transfer balances for inventory to the statement of profit or loss?

• The starting balance will be on the debit side

  • This will be the value of the opening inventory
  • This will be brought down as the closing inventory from the previous year

• At the end of the year

  • Transfer the balance of the opening inventory to the statement of profit or loss

    • Debit the statement of profit or loss

      • This is an expense for the current year

    • Credit the inventory account

      • The asset is decreasing

  • Total the inventory account to give a zero balance

  • Transfer the balance of the closing inventory from the statement of profit or loss

    • Debit the inventory account

      • The asset is increasing

    • Credit the statement of profit or loss

      • This is not an expense for the current year
      • It will be an expense for the following year

  • Balance the inventory account and bring down the balance

    • This will be the value of the closing inventory for the current year
    • This is the value of the opening inventory for the next year

Worked Example On 1 April 2023, Hashim had an opening inventory of $4 500.

On 31 March 2024, Hashim had a closing inventory of $3 600.

Prepare the inventory account at 31 March 2024. Balance the account and bring down the balance on 1 April 2024.

Answer:

Inventory Account

Date	Details	$**	Date	Details	**$
Final answer: 2023 Final answer: Apr 1	Final answer: Balance b/d	Final answer: 4 500	Final answer: 2024 Final answer: Mar 31	Final answer: Statement of profit or loss	Final answer: 4 500
		Final answer: 4 500			Final answer: 4 500
Final answer: 2024 Final answer: Mar 31	Final answer: Statement of profit or loss	Final answer: 3 600	Final answer: 2024 Final answer: Mar 31	Final answer: Balance c/d	3 600
		Final answer: 3 600			Final answer: 3 600
Final answer: Apr 1	Final answer: Balance b/d	Final answer: 3 600

In which account do I enter the profit or loss?

• The statement of profit or loss will show the profit or loss for the year

• This balance is transferred to the capital account

  • Debit the capital account if it is a loss
  • Credit the capital account if it is a profit

• The total capital can be calculated at the end of the year:

  • Transfer the balance on the drawings account to the capital account

    • This will be a debit entry

  • Balance the capital account

Worked Example Zabir had $80 000 capital on 1 June 2023. Zabir made a profit of $40 000 for the year ending 31 May 2024. During that year, Zabir took $15 000 from the business for personal use.

Prepare the capital account at 31 May 2024. Balance the account and bring down the balance on 1 June 2024.

Answer:

Capital Account

Date	Details	$**	Date	Details	**$
Final answer: 2024 Final answer: May 31	Final answer: Drawings	Final answer: 15 000	Final answer: 2023 Jun 1	Final answer: Balance b/d	Final answer: 80 000
Final answer: 2024 Final answer: May 31	Final answer: Balance c/d	Final answer: 105 000	Final answer: 2024 May 31	Final answer: Statement of profit or loss (Profit for the year)	Final answer: 40 000
		Final answer: 120 000			Final answer: 120 000
			Final answer: 2024 Jun 1	Balance b/d	Final answer: 105 000