Reporting for Profit Acc Ch.10

closing the ledger

transferring balances from revenue & expense ledger accounts to the profit and loss summary account so that profit can be calculated

profit and loss summary

a general ledger account that is used to summarise revenues and expenses so that profit can be calculated

income statement

an accounting report that details the revenues earned and expenses incurred during the current period

Why can’t profit be determined using only the Going Concern assumption?

Because if the business never ends, profit could only be calculated at the end of the business’s life.

What is meant by a reporting Period being “arbitrary”?

The length of the reporting period is chosen by the owners and can vary.

How is profit determined under the Accrual Basis assumption?

By comparing revenue earned against expenses incurred in the same reporting period.

How does the Accrual Basis assumption support Relevance?

It ensures only useful information relating to the current period is included for decision-making.

Why would including drawings or loan repayments in the Income Statement reduce Relevance?

Because they are not revenues or expenses and do not help determine profit.

Why are only revenue and expense accounts closed?

Because revenues and expenses relate only to one reporting period.

Why are asset, liability, and owner’s equity accounts not closed?

Because they continue into future reporting periods.

What happens to asset and liability accounts at the end of a period?

they are balanced and carried forward to the next period.

How is Sales Returns treated during closing entries?

it is credited because it is a negative revenue account with a debit balance.

How is Net Profit calculated in the Profit and Loss Summary account?

Revenue minus expenses.

What does a Net Profit represent?

An increase in owner’s equity.

Why is the Profit and Loss Summary account considered temporary?

Because it exists only during the closing process and is never shown in reports.

profitability

the ability of a business to earn profit as expressed in relative terms by comparing profit against a base like sales, assets or owner’s equity

net profit margin NPM

a profitability indicator that indicates expense control by calculating the percentage of Net Sales revenue that is retained as Net Profit

NPM formula

Gross profti margin GPM

a profitability indicator that measures the average mark-up by calculating the percentage of Net Sales revenue that is retained as Gross Profit

Why is a separate Drawings account used?

To identify the owner’s drawings for a particular period and compare them with Net Profit.