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Closing Entries – Detailed Preparation

This lesson walks through the actual journal entries required to close the books for a trading/​manufacturing business.

Scenario Recap

XYZ Manufacturing Ltd. – FY 2024‑25

  • Net Loss from Profit & Loss Account: ₹20,000 (see Lesson 44).
  • Revenue and expense balances are as follows:
AccountDebit (₹)Credit (₹)
Sales Revenue8,00,000
Purchase Returns30,000
Carriage Inwards20,000
Direct Wages45,000
Carriage Outwards (Direct Expense)30,000
Rent (Indirect Expense)40,000
Administrative Salaries (Indirect)35,000
Utilities (Indirect)10,000

Step‑by‑Step Closing Entries

1. Close Revenue Accounts

Dr. Sales Revenue                     8,00,000
    Cr. Profit & Loss Account                     8,00,000

2. Close Purchase Returns (a contra‑revenue account)

Dr. Profit & Loss Account               30,000
    Cr. Purchase Returns                         30,000

3. Close Direct Expenses (Carriage Inwards, Direct Wages, Carriage Outwards)

Dr. Profit & Loss Account               95,000
    Cr. Carriage Inwards                         20,000
    Cr. Direct Wages                             45,000
    Cr. Carriage Outwards                        30,000

4. Close Indirect Expenses (Rent, Salaries, Utilities)

Dr. Profit & Loss Account               85,000
    Cr. Rent                                     40,000
    Cr. Administrative Salaries                  35,000
    Cr. Utilities                               10,000

5. Transfer Net Loss to Capital (or Retained Earnings)

Since the total expenses (180,000) exceed revenue (8,00,000 – 30,000 = 7,70,000), the Net Loss is ₹20,000.

Dr. Capital (Retained Earnings)          20,000
    Cr. Profit & Loss Account                     20,000

Result: All temporary accounts now have a zero balance, and the loss is reflected in equity.

Verification Checklist

  • All revenue and expense accounts are debited/credited to Profit & Loss Account.
  • Net profit/loss transferred to Capital.
  • Temporary accounts show a zero balance after posting.

Common Pitfalls

  • Forgetting to close Purchase Returns (a contra‑revenue) – it will leave a residual balance.
  • Not adjusting for Net Loss correctly (should debit Capital, not credit).
  • Missing any indirect expense – leads to overstated profit.

Quiz

Test Your Knowledge

Question 1 of 3

1. Closing entry for a revenue account uses:

Debit Revenue, Credit Profit & Loss
Credit Revenue, Debit Profit & Loss
Debit Revenue, Credit Capital
Credit Revenue, Debit Capital

💡 Final Wisdom: "Closing entries are the final brush‑strokes of the accounting period – get them right and your next period starts with a clean canvas."

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