8
THE FINAL STAGES
8.1
Closing the ledger accounts
In real life, the next stage after the trial balance is to make any necessary adjustments to the
ledger accounts at the end of an accounting period. This is done by using an extended trial
balance (‘ETB’) showing the original trial balance figures in the first two columns then
recording year end adjustments in further columns. The final columns on the far right hand side
of the ETB give you the figures to prepare the statement of financial position and income
statement.
In our simple example there is only one adjustment, which we can leave for a moment since it
doesn’t affect the ledger accounts which we have already prepared.
We can therefore go on to ‘close’ the ledger accounts in preparation for the final accounts.
What this means depends on the type of item in each ledger account.
Accounts showing income or expenditure are closed by transferring the balance on each
account to the profit and loss account.
Accounts showing assets or liabilities are left exactly as they are; the balances are shown in the
statement of financial position.
Examples of each should help to explain what we mean. Take purchases as an instance of an
account showing expenditure.
This has to be transferred to the profit and loss account, and the account is closed as follows:
Purchases
Cash
Payables
Payables
Cash
Payables
Balance b/f
£
4,000
2,000
6,000
3,000
500
£
15,500
Balance c/f
________
________
15,500
15,500
________
________
15,500
________
Transfer to
Profit and loss
account
15,500
________
Although we show the profit and loss account or income statement in vertical form, as in
Chapter 5, it is in fact a ledger account with debits and credits like any other. It’s debited with
expenditure and credited with income.
Thus the debit balance on the purchases account is transferred to the debit of the profit and loss
account.
Now take a statement of financial position item  payables.
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Payables
Cash
Balance c/f
£
3,500
6,100
£
Purchases
2,000
Purchases
6,000
Purchases
500
Rent payable
800
Non-current assets 300
_______
_______
9,600
9,600
_______
_______
Balance b/f
6,100
If you think of the statement of financial position as a ‘snapshot’ taken at a particular moment,
you can see that the balances at the end of one period are the same as those at the beginning of
the next.
Therefore we leave this credit balance where it is: Percy Pilbeam owes trade payables £6,100
at midnight on 28 February (the time of the ‘snapshot’), and also, not surprisingly, still owes
them £6,100 at 12.01 am on 1 March.
8.2
Closing Percy Pilbeam’s accounts
First let us establish which ledger accounts are which  we’ve done two already.
Try filling in the gaps:
Purchases
 expenditure

profit and loss account
Payables
 liability

statement of financial position
Cash 
...........  ............
Answer
asset
 statement of financial position
Capital 
............  ............
liability
 statement of financial position
Sales 
............  ............
income
 profit and loss account
Electricity 
............  ............
expenditure
 profit and loss account
asset
 statement of financial position
 statement of financial position
Non-current assets ............  ............

............  ............
Drawings 
Receivables 
............  ............
reduction in
liability
asset
Rent payable 
............  ............
expenditure
 profit and loss account
Telephone 
............  ............
expenditure
 profit and loss account
Rent receivable 
............  ............
income
 profit and loss account
 statement of financial position
Now go back to Chapter 7, paragraph 7.4 and close off the income and expenditure accounts to
the profit and loss account, leaving the asset and liability accounts as they are. The final
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version follows in the next page; don’t look up until you’ve done your own. See if you can
guess what to do with drawings.
Cash
Capital
Sales
Sales
Receivables
Rent receivable
Balance b/f
£
10,000
5,000
2,500
7,500
100
Purchases
Electricity
Non-current assets
Drawings
7,500
Purchases
Payables
Telephone
Drawings
Balance c/f
£
4,000
200
4,000
500
3,000
3,500
200
400
9,300
_________
________
25,100
25,100
_________
________
9,300
Non-current assets
Cash
Payables
£
4,000
300
£
4,300
Balance c/f
_______
Balance b/f
_______
4,300
4,300
_______
_______
4,300
Payables
Cash
Balance c/f
£
3,500
6,100
£
Purchases
2,000
Purchases
6,000
Purchases
500
Rent
800
Non-current assets 300
_______
_______
9,600
9,600
_______
_______
Balance b/f
6,100
Receivables
Sales
Sales
£
7,500
2,000
£
7,500
2,000
Cash
Balance c/f
_______
Balance b/f
_______
9,500
9,500
_______
_______
2,000
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Purchases
Cash
Payables
Payables
Cash
Payables
£
4,000
2,000
6,000
3,000
500
£
15,500
Balance c/f
_________
Balance b/f
__________
15,500
15,500
_________
__________
15,500
Profit & loss a/c
15,500
Sales
Balance c/f
£
17,000
£
5,000
2,500
7,500
2,000
Cash
Cash
Receivables
Receivables
________
________
17,000
17,000
________
Profit & loss a/c
17,000
________
Balance b/f
17,000
________
________
Drawings
Cash
Cash
£
500
400
£
900
Balance c/f
_______
Balance b/f
_______
900
900
_______
_______
900
Transfer to Capital
_______
900
_______
Capital
Balance c/f
£
10,000
£
10,000
Cash
__________
Transfer from
Drawings
__________
10,000
10,000
__________
__________
900
Balance b/f
10,000
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7,500
2,000
Electricity
£
200
Cash
£
200
Balance c/f
_______
Balance b/f
_______
200
200
_______
_______
200
Profit & loss a/c
_______
200
_______
Rent payable
Payables
£
800
£
800
Balance c/f
_______
Balance b/f
_______
800
800
_______
_______
800
Profit & loss a/c
_______
800
_______
Telephone
£
200
Cash
£
200
Balance c/f
_______
Balance b/f
_______
200
200
_______
_______
200
Profit & loss a/c
_______
200
_______
Rent receivable
Balance c/f
£
100
£
100
Cash
_______
Profit & loss a/c
_______
100
100
_______
_______
100
Balance b/f
100
_______
_______
Notice two things here:
(a)
As we said in paragraph 5.9, drawings are not deducted in arriving at net profit, since
they aren’t a trading expense. The best thing, therefore, to do is to show them as a
deduction from capital in the statement of financial position. In order to do this we
close the drawings account by debiting the total to the capital account (thus reducing
the overall liability to Percy as proprietor).
(b)
Following on from (a), you may have noticed that we have left the capital account
incomplete. Try to guess what should be entered in this account to finish the job?
Profit or Loss for period.
The proprietor is entitled to take any profit made out of the business and it is therefore part of
proprietor’s funds.
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8.3
Closing inventories
This is the one adjustment which we have to make in order to make Percy Pilbeam’s accounts
work.
When writing up ledger accounts we advised you to debit the purchases account rather than an
inventories account for goods bought for resale. This works well during a period, but at the end
of the period we have to show how much unsold inventories a business has at that date.
If you look back to Chapter 6, you will find that Percy has sold:

all the fruit which he’d bought;

all of his first purchase of vegetables but only half his second purchase;

none of the prunes (what a surprise!)
The second purchase of vegetables cost £3,000, so that if he has half of these left, their cost
must be £1,500.
The prunes, all of which are still in inventories, cost £500.
Assuming that Percy still expects to sell his inventories for more than he paid for it, his closing
inventories on 28 February, at cost, amounts to
£
1,500
500
Vegetables
Prunes
_______
Closing inventories
2,000
_______
Closing inventories has its own double entry, which is:
Debit
Inventories account (statement of financial position)
Credit
Profit and loss account.
The debit entry establishes inventories as an asset in the statement of financial position: the
credit entry, as you will see in the next paragraph, shows it as a deduction from goods
available for sale, in arriving at cost of goods sold. (If you’ve forgotten this principle, look
back to paragraph 5.5).
8.5
The profit and loss account shown as a ledger account
So that you can see how the double entry continues to operate even when we are closing the
ledger accounts, we will set out the profit and loss account as a ledger account. This should
also set you up for producing Percy Pilbeam’s final accounts.
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Profit and loss account
£
Opening inventories 
Purchases
15,500
Gross profit c/f
3,500
£
Sales
17,000
Closing inventories2,000
________
________
19,000
19,000
________
________
Electricity
Rent payable
Telephone
Net profit c/f
200
800
200
2,400
Gross profit b/f
Rent receivable
3,500
100
_______
________
Capital account
3,600
3,600
________
________
2,400
Net profit b/f
2,400
_______
_______
We don’t use an inventories T account, the closing inventories adjustment is recorded directly
on the ETB and subsequently on the statement of financial position and income statement.
Just for good measure, here is the capital account.
Capital
Drawings
Balance c/f
£
900
11,500
£
10,000
Cash
Profit for the
period
2,400
________
________
12,400
12,400
________
________
Balance b/f
11,500
This figure of £11,500 is the opening capital balance for the next period.
8.5
Percy Pilbeam’s final accounts
At last you should be ready to produce the final accounts  income statement and statement of
financial position  for Percy’s business at the end of his first two months of trading.
Have a go at it, using the information from the ledger accounts and trial balance. The answers
follow the two pages left for your efforts.
To help get you started refer to the proforma income statement and statement of financial
position in chapters 4 and 5.
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P PILBEAM
INCOME STATEMENT
for the two months ended
28 February 20X1
£
61
£
P PILBEAM
Statement of financial position
as at 28 February 20X1
£
62
£
ANSWER
P PILBEAM
INCOME STATEMENT
for the two months ended
28 February 20X1
£
Revenue
Cost of sales
Opening inventories
Purchases
Less closing inventories
£
17,000

15,500
(2,000)
________
(13,500)
________
Gross profit
3,500
Sundry income
Rent receivable
100
Expenses
Electricity
Rent payable
Telephone
200
800
200
________
(1,200)
________
Net profit
2,400
________
63
P PILBEAM
Statement of financial position
as at 28 February 20X1
£
ASSETS
Non-current assets
Current assets
Inventories
Receivables
Cash
£
4,300
2,000
2,000
9,300
________
13,300
________
Total assets
17,600
________
CAPITAL AND LIABILITIES
Capital
As at 1 January 20X1
Profit for the period
Less drawings
10,000
2,400
(900)
________
At 28 February 20X1
11,500
Non-current liabilities
Current liabilities
Trade payables and accruals
6,100
________
6,100
________
Total capital and liabilities
17,600
______
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8.6
Conclusion
You have now (or should have, provided that you haven’t just looked up the answer instead of
trying it for yourself) produced what may well have been your first set of accounts.
An unrealistically simple set certainly: but it is the first, and we sincerely hope that it won’t be
the last. All accounts, though inevitably more complicated and sophisticated, are still dependent
on the two basic principles of bookkeeping, namely:
(a)
Every transaction has two effects (dual effect).
(b)
The net assets of the business are equal to the funds which the proprietor has invested
in the business (accounting equation).
Finally, we hope that this introduction has been helpful  and that you do still want to be an
accountant.
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