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Debit Credit

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									Accounting Cycle IV
Lecture Outline
 Closing Entries
      Defined
      Closing Revenue Accounts
      Closing Expense Accounts

 Allocation of Profit/Loss (Partnership)
      Fixed Capital Balance Method

 Closing Drawings Account
Closing Entries

 At the end of each new accounting period the
  balances within the revenue and expense
  accounts at the end of the old accounting
  period must be “closed off”.

“Closing Off the accounts”
 Simply means that accounts are returned to a
  zero balance.
Closing Entries
 Revenue and expense accounts are closed
 off to ensure that only revenues earnt and
 expenses incurred within a period are
 included within the Statement of Financial
 Performance.
Closing Revenue Accounts
 Revenue accounts are closed by debiting the
  revenue account by the amount of the closing
  balance and then crediting the P&L Summary
  account by the same amount.


Example
 “Novel Sports” sells $60,000 worth of goods in the
  period. The sales revenue account would be debited
  by $60,000 and the P&L Summary account would be
  credited by $60,000.
Closing Revenue Accounts
General Journal Entry
                  Debit    Credit
Sales Revenue     60,000
 P&L Summary               60,000
Closing Expense Accounts
 Expense accounts are closed by crediting the
  expense account by the amount of the
  closing balance and then debiting the P&L
  Summary account by the same amount.

Example
 The wages expense for “Novel Sports” is $10,000.
  The wages account needs to be credited by $10,000
  and the P&L Summary account debited by $10,000.
Closing Expense Accounts
General Journal Entry
                  Debit    Credit
P&L Summary       10,000
 Wages Expense             10,000
Closing the P&L Summary
 The P&L Summary is a temporary
 account. It is closed off to the Profit
 Distribution account at the end of the
 accounting period.
Closing the P&L Summary
Example
 “Novel Sports” has made a $50,000 profit (ie
  $60,000 – 10,000) then the P&L Summary
  will have a $50,000 credit balance. This
  needs to be closed off to the profit distribution
  account
Closing the P&L Summary
                    Debit     Credit
P&L Summary          50,000
 Profit Distribution          50,000
Allocation of Profit/Loss
 Three methods for allocating profit are as
  follows:
     Fixed ratio
     Ratio based on capital balances
     Fixed ratio after deducting interest on partners
      capital and salaries paid to partners.

 The manner in which profits are to be
  allocated should be outlined in the
  partnership agreement.
Example
 Matt and Justin are partners in “Novel
  Sports”.
 Capital Investments are as follows:
      Justin     $200,000
      Matt       $150,000

 Profit for the year is $50,000.
1. Fixed Ratio
 The partnership agreement specifies that net profit is
  to be allocated on the following basis (60% Justin,
  40% Matt).

                                   Debit        Credit
Profit Distribution               50,000
 Retained Profits - Justin                      30,000
 Retained Profits - Matt                        20,000
Statement of Financial Position
Equity
Equity
 Capital - Justin           200,000
 Capital - Matt             150,000
 Retained Profits- Justin    30,000
 Retained Profits - Matt     20,000
Total Equity                400,000
2. Ratio Based on Capital
Balances
 Justin and Matt agree to share profit based
  on opening capital balances.

 In this way, the partner that has invested
  more money into the business receives a
  greater proportion of any profit or loss.
2. Ratio Based on Capital
Balances
Justin:    200/350 x 50,000 = 28,571
Matt:      150/350 x 50,000 = 21,429

                      Debit       Credit
Profit Distribution      50,000
 Retained Profits - Justin        28,571
 Retained Profits - Matt          21,429
Statement of Financial Position
Equity
Equity
 Capital – Justin           200,000
 Capital - Matt             150,000
 Retained Profits- Justin    28,571
 Retained Profits - Matt     21,429
Total Equity                400,000
3. Fixed Ratio after Interest on
Capital and Salaries
 Partners may specify within the partnership
  agreement that each partner is to receive the
  following:
     Interest on Opening Capital
     Salary

 Interest and Salaries to partners are paid out
  of the profit (ie they are not expenses of the
  business).
3. Fixed Ratio after Interest on
Capital and Salaries
 Matt and Justin agree that 10% interest on
  opening capital should be paid each year.

 Interest allocated to each partner from profit
   Justin:   10% x 200,000 = 20,000
   Matt:     10% x 150,000 = 15,000
Profit Distribution


             $50,000

         Justin        Matt
        $20,000       15,000
3. Fixed Ratio after Interest on
Capital and Salaries
 The partners agree that Justin should receive
  a salary of $7,000 and Matt a salary of
  $3,000.
Profit Distribution


             $50,000

         Justin    Matt
        $20,000   $15,000

         $7,000   $3,000
3. Fixed Ratio after Interest on
Capital and Salaries
 The remaining profit ($5,000) is then
  allocated according to fixed ratio (ie 4:6)

 Profit allocated to each partner from profit
   Justin:   60% x 5,000 = 3,000
   Matt:     40% x 5,000 = 2,000
                    $50,000

          Justin               Matt
          $20,000             $15,000


$7,000               $3,000

         $3,000               $2,000

                     Total               Total
                    $30,000             $20,000
Distribution of Profit
                             Debit    Credit
Profit Distribution          50,000
 Retained Profits - Justin            30,000
 Retained Profits - Matt              20,000
Statement of Financial Position
Equity
Equity
 Capital - Justin           200,000
 Capital - Matt             150,000
 Retained Profits- Justin    30,000
 Retained Profits - Matt     20,000
Total Equity                400,000
Closing Drawings
 At the end of the period any drawings by
  partners are closed off to the respective
  partners retained profit account.

 Drawings by each partner during the period
  Justin:   9,000
  Matt:     6,000
Closing Drawings
                            Debit   Credit
Retained Profits - Justin   9,000
Retained Profits – Matt     6,000
 Drawings - Justin                  9,000
 Drawings – Matt                    6,000
Statement of Financial Position
Equity
Equity
 Capital – Justin           200,000
 Capital - Matt             150,000
 Retained Profits- Justin    21,000
 Retained Profits - Matt     14,000
Total Equity                385,000

								
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