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Transfer of Net Profit to Capital account or Profit & Loss Appropriation account

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Balances in Trading a/c, Profit and Loss a/c

 
 

All the nominal accounts are closed at the end of the accounting period by transfer to either the Trading a/c or the Profit and Loss a/c as the case may be.

• Balance in Trading a/c

The "Trading a/c" is a nominal account. It is closed at the end of the accounting period by transferring its balance (Gross profit/loss) to the "Profit and Loss a/c".

Thus the trading account can be placed on par with any other nominal account.

• Balance in Profit and Loss a/c

The Profit and Loss a/c is a nominal account. It is closed at the end of the accounting period by transferring its balance to either the Capital a/c or the Profit and Loss Appropriation a/c (or Retained Earnings a/c).

The "Trading a/c" and "Profit and Loss a/c" relating to a particular accounting period are independent of similar accounts relating to any other accounting period.

Transfer of Profit and Loss a/c balance : To Capital a/c

 
 

» Influence of Profits on Capital

Profits (including losses which can be understood as negative profits) are the returns for the risk that Capital takes in business. Profits increase capital and losses decrease capital.

» Transfer to Capital a/c

The net profit belongs to the ownership of the business which is represented by the Capital account. Therefore, the net profits or losses are ultimately transferred to the Capital account.

The Profit and Loss a/c is closed by transferring the balance to either the "Capital a/c".

Transfer of Profit and Loss a/c balance : To Profit and Loss Appropriation a/c

 
 
At the time of starting the business, the owner invests certain amount as his capital contribution for the business either in the form of cash or any other assets.

As time goes by, the organisation would be making profits or losses over the various accounting periods that it passes through.

When profits or losses are transferred to the Capital account, the balance in that account increases when there are profits and decreases when there are losses. Thus, the capital account balance is a figure that gets altered by the amounts of profits and losses made over the years.

• Distinct Information

If the organisation intends to have the information relating to the contribution made by the owners towards capital as well as the addition/shortage of capital that has accumulated in the business on account of the profits/losses made by over the years (through its operations) separately, it would transfer the profits or losses to a separate account by name "Profit and Loss appropriation a/c" or "Retained Earnings a/c" instead of to the "Capital a/c".

The basic purpose of accounting is derivation of information and the more the information we need, the more the accounting heads we need to maintain.

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Transferring Profits » Illustration : Trading a/c, Profit and Loss a/c

 
 

Consider the following ledger account balances relating to an accounting period
Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005
Particulars L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
Opening Stock a/c
Purchases a/c
Salaries a/c
Rent a/c
Wages a/c
Carriage Inwards a/c
Cash a/c
Furniture a/c
Capital a/c
Bank a/c
Creditors a/c
Sales a/c
Debtors a/c
Machinery a/c
Bank Loan a/c














20,000
1,20,000
25,000
18,500
47,000
12,400
24,600
44,000

75,000


62,900
1,76,000








1,84,000

37,300
3,32,000


72,100
Total   6,25,400 6,25,400
DrTrading a/c
[of M/s Razmataz Chemicals for the period ending 31st December 2005]
Cr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Opening Stock
To Purchases
To Wages a/c
To Carriage Inwards a/c
To Gross Profit
20,000
1,20,000
47,000
12,400
1,32,600
By Sales a/c
3,32,000
  3,32,000   3,32,000
DrProfit & Loss a/c
[of M/s Razmataz Chemicals for the period ending 31st December 2005]
Cr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Salaries
To Rent
To Net Profit
25,000
18,500
89,100
By Gross Profit 1,32,600
  1,32,600   1,32,600

Transfer of Net Profit : To Capital a/c

 
 
  • The P/L a/c shows a credit balance when there are profits.
  • Transferring a credit balance from one account to a second would result in the second account being credited and the first account being debited.

» Journal

The journal entry for transfer of the net profit from P/L a/c to the Capital a/c would therefore be

Journal in the books of M/s Razmataz Chemicals for the period from __ to 31st December 2005
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
1st to 30th Dr
89,100
89,100
[For the transfer of the net profit to the capital account.]

» Ledger

DrCapital a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
30/06/05 To Bal c/d 2,73,100 __-31st
31/12/05
By bal b/d
By Net Profit

1,84,000
89,100
  Total   2,73,100   Total   2,73,100
        01/01/06 By Balance b/d 2,73,100

• Trial Balance and Balance Sheet » Hide/Show

» Trial Balance

The "Trial Balance" redrawn after closing the "Profit and Loss a/c"

Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005
Particulars L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
Cash a/c
Furniture a/c
Capital a/c
Bank a/c
Creditors a/c
Debtors a/c
Machinery a/c
Bank Loan a/c







24,600
44,000

75,000

62,900
1,76,000


2,73,100

37,300


72,100
Total   3,82,500 3,82,500

» Balance Sheet

Balance Sheet of M/s Razmataz Chemicals" as on 31-12-2005
Liabilities Amount Assets Amount
Capital
Creditors
Bank Loan
2,73,100
37,300
72,100
Cash
Bank
Furniture
Debtors
Machinery
24,600
75,000
44,000
62,900
1,76,000
  3,82,500   3,82,500

Transfer of Net Profit : To Profit and Loss Appropriation a/c

 
 
  • The P/L a/c shows a credit balance when there are profits.
  • Transferring a credit balance from one account to a second would result in the second account being credited and the first account being debited.

» Journal

The journal entry for transfer of the net profit from P/L a/c to the "Profit and Loss Appropriation a/c" would be

Journal in the books of M/s Trinity Foods for the period from 1st June 2005 to 30th June 2005
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
1st to 30th Dr
47,000
47,000
[For the transfer of the net profit to the profit and loss appropriation account.]

» Ledger

DrProfit and Loss Appropriation a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
30/06/05 To Bal c/d 47,000 30/06/05 By Net Profit 47,000
  Total   47,000   Total   47,000
        30/06/05 By Balance b/d 47,000

• Trial Balance and Balance Sheet » Hide/Show

» Trial Balance

The "Trial Balance" redrawn after closing the "Profit and Loss a/c" in this case would be

Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005
Particulars L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
Cash a/c
Furniture a/c
Capital a/c
Bank a/c
Creditors a/c
Debtors a/c
Machinery a/c
Bank Loan a/c
Profit and Loss Appropriation a/c








24,600
44,000

75,000

62,900
1,76,000



1,84,000

37,300


72,100
89,100
Total   3,82,500 3,82,500

» Balance Sheet

Balance Sheet of M/s Razmataz Chemicals" as on 31-12-2005
Liabilities Amount Assets Amount
Capital
P & L Appropriation
Creditors
Bank Loan
1,84,000
89,100
37,300
72,100
Cash
Bank
Furniture
Debtors
Machinery
24,600
75,000
44,000
62,900
1,76,000
  3,82,500   3,82,500

• Alternative

Balance Sheet of M/s Razmataz Chemicals" as on 31-12-2005
Liabilities Amount Amount Assets Amount Amount
Capital
(Add:) P & L Appropriation
Creditors
Bank Loan
1,84,000
89,100

2,73,100
37,300
72,100
Cash
Bank
Furniture
Debtors
Machinery
  24,600
75,000
44,000
62,900
1,76,000
    3,82,500     3,82,500

The basic purpose of accounting is derivation of information. Where the organisation feels that in addition to having the information relating to the Capital a/c and the accumulated profits separately, it also needs to know the total amount of capital available with it (including accumulations), the two accounts are clubbed and shown in the Balance Sheet.

Since here both the accounts lie on the same side of the balance sheet, the two amounts are added up.

Transferring Net Loss » Trading a/c, Profit and Loss a/c

 
 
Consider the following ledger account balances relating to an organisations accounting
Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005
Particulars L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
Opening Stock a/c
Purchases a/c
Salaries a/c
Postage & Stationary a/c
Wages a/c
Carriage Outwards a/c
Rent & Insurance a/c
Cash a/c
Furniture a/c
Capital a/c
Bank a/c
Creditors a/c
Sales a/c
Debtors a/c
Land and Buildings a/c
Debenture Loan a/c
















50,000
2,35,000
48,000
8,500
15,000
24,400
18,250
86,000
24,000

61,000


58,600
1,45,000









2,50,000

58,250
2,63,400


2,02,100
Total   7,73,750 7,73,750
DrTrading a/c
[of M/s Razmataz Chemicals for the period ending 31st December 2005]
Cr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Opening Stock
To Purchases
To Wages a/c
To Gross Profit
50,000
2,35,000
15,000
By Sales

By Gross Loss
2,63,400
36,600
  3,00,000   3,00,000
DrProfit & Loss a/c
[of M/s Razmataz Chemicals for the period ending 31st December 2005]
Cr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Gross Loss
To Salaries
To Postage and Stationery
To Carriage Outwards
To Rent and Insurance
36,600
48,000
8,500
24,400
18,250
By Net Loss 1,35,750
  1,35,750   1,35,750

Transfer of Net Loss : To Capital a/c

 
 
  • The P/L a/c shows a debit balance when there are losses.
  • Transferring a debit balance from one account to a second would result in the second account being debited and the first account being credited.

» Journal

The journal entry for transfer of the net loss from P/L a/c to the Capital a/c would be

Journal in the books of M/s _____ for the period ending 32st December 2005
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
1st to 30th Dr
1,35,750
1,35,750
[For the transfer of the net loss to the capital account.]

» Ledger

DrCapital a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
31/12/05
31/12/05
To Net Loss
To Bal c/d

1,35,750
1,14,250
31/12/05 By Balance b/d 2,50,000
  Total   2,50,000   Total   2,50,000
        01/07/05 By Balance b/d 1,14,250

• Trial Balance and Balance Sheet » Hide/Show

» Trial Balance

The "Trial Balance" redrawn after closing the "Profit and Loss a/c"

Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005
Particulars L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
Cash a/c
Furniture a/c
Capital a/c
Bank a/c
Creditors a/c
Debtors a/c
Land and Buildings a/c
Debenture Loan a/c








86,000
24,000

61,000

58,600
1,45,000


1,14,250

58,250


2,02,100
Total   3,74,600 3,74,600

» Balance Sheet

Balance Sheet of M/s Razmataz Chemicals" as on 31-12-2005
Liabilities Amount Assets Amount
Capital
Creditors
Debenture Loan
1,14,250
58,250
2,02,100
Cash
Bank
Furniture
Debtors
Land and Buildings
86,000
61,000
24,000
58,600
1,45,000
  3,74,600   3,74,600

Transfer of Net Loss : To Profit and Loss Appropriation a/c

 
 
  • The P/L a/c shows a debit balance when there are losses.
  • Transferring a debit balance from one account to a second would result in the second account being debited and the first account being credited.

» Journal

The journal entry for transfer of the net loss from P/L a/c to Profit and Loss Appropriation a/c would be

Journal in the books of M/s _____ for the period ending 32st December 2005
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
1st to 30th Dr
1,35,750
1,35,750
[For the transfer of the net loss to the profit and loss appropriation account.]

» Ledger

DrProfit and Loss Appropriation a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
31/12/05 To Net Loss 1,35,750 31/12/05 By Balance c/d 1,35,750
  Total   1,35,750   Total   1,35,750
30/06/05 To Balance b/d 1,35,750        

• Trial Balance and Balance Sheet » Hide/Show

» Trial Balance

The "Trial Balance" redrawn after closing the "Profit and Loss a/c"

Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005
Particulars L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
Cash a/c
Furniture a/c
Capital a/c
Bank a/c
Creditors a/c
Debtors a/c
Land and Buildings a/c
Debenture Loan a/c
Profit and Loss Appropriation a/c









86,000
24,000

61,000

58,600
1,45,000

1,35,750


2,50,000

58,250


2,02,100
Total   5,10,350 5,10,350

» Balance Sheet

Balance Sheet of M/s Razmataz Chemicals" as on 31-12-2005
Liabilities Amount Assets Amount
Capital
Creditors
Debenture Loan
2,50,000
58,250
2,02,100
Cash
Bank
Furniture
Debtors
Land and Buildings
P & L Appropriation
86,000
61,000
24,000
58,600
1,45,000
1,35,750
  5,10,350   5,10,350

• Alternative

Balance Sheet of M/s Razmataz Chemicals" as on 31-12-2005
Liabilities Amount Amount Assets Amount Amount
Capital
(Less:) P & L Appropr.
Creditors
Debenture Loan
2,50,000
1,35,750

1,14,250
2,02,100
Cash
Bank
Furniture
Debtors
Land and Buildings
  86,000
61,000
24,000
58,600
1,45,000
    3,74,600     3,74,600

The basic purpose of accounting is derivation of information. Where the organisation feels that in addition to having the information relating to the Capital a/c and the accumulated profits separately, it also needs to know the total amount of capital available with it (including accumulations), the two accounts are clubbed and shown in the Balance Sheet.

Since here both the accounts lie on different sides of the balance sheet, the two amounts are set off.

Showing an item on a particular side and deducting the item from another item on the opposite side of the balance sheet would give the same effect.

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Using the phrases Net Profit, Net Loss in Ledger Postings

 
 
If we post the Journal entry for transferring
  • The profit from the "Profit & Loss a/c"
    1. To Capital a/c

      The posting on

      1. The debit side of Profit and Loss a/c should read "To Capital a/c"
      2. The credit side of Capital a/c should read "By Profit and Loss a/c"
    2. To Profit and Loss Appropriation a/c

      The posting on

      1. The debit side of Profit and Loss a/c should read "To Profit and Loss Appropriation a/c"
      2. The credit side of Profit and Loss Appropriation a/c should read "By Profit and Loss a/c"
  • The loss from the "Profit & Loss a/c"
    1. To Capital a/c

      The posting on

      1. The credit side of Profit and Loss a/c should read "By Capital a/c"
      2. The debit side of Capital a/c should read "To Profit and Loss a/c"
    2. To Profit and Loss Appropriation a/c

      The posting on

      1. The credit side of Profit and Loss a/c should read "By Profit and Loss Appropriation a/c"
      2. The debit side of Profit and Loss Appropriation a/c should read "To Profit and Loss a/c"

» Postings only indicate transfer of balances

These postings only give us an idea that there is a transfer from the "Profit and Loss a/c" to the "Capital a/c" or "Profit & Loss Appropriation a/c". They do not indicate the reason (idea of why the posting is being made) for the transfer and the direction of transfer.

Consider the journal entry for transfer of net profit from the profit and loss account to the capital account

Journal in the books of M/s Razmataz Chemicals for the period from __ to 31st December 2005
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
1st to 30th Dr
89,100
89,100

This can be interpreted as

  • Transfer of Credit balance From Profit and Loss a/c To Capital a/c

    Transferring a credit balance from one account to a second would result in the second account being credited and the first account being debited.

  • Transfer of Debit balance From Capital a/c To Profit and Loss a/c

    Transferring a debit balance from one account to a second would result in the second account being debited and the first account being credited.

• Deriving Additional Information

The basic purpose of accounting is derivation of information. The more the information we need, the more the accounting heads we need to maintain.

Therefore, to give us the additional information relating to the reason and direction of transfer, we create and use additional ledger accounts by name "Net Profit a/c" and "Net Loss a/c".

» To/By Net Profit

The Net Profit from the Profit and Loss a/c is transferred to the Net Profit a/c and from there to the Capital a/c or the Profit and Loss Appropriation a/c.

By using this additional account we can ensure that the postings would read To Net Profit in the Profit and Loss account and By Net Profit in the Capital or Appropriation accounts.

Journal/Ledger » Hide/Show

Journal in the books of M/s Razmataz Chemicals for the period from ___ to 31st December 2005
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
1st to 30th Dr
47,000
47,000
[For the transfer of the net profit to the Net Profit account.]
1st to 30th Dr
89,100
89,100
[For the transfer of the net profit from the Net Profit account to the capital account or the profit and loss appropriation account.]
DrNet Profit a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
31/12/05 To Capital a/c
(Or)
To P/L Appropr. a/c
89,100 31/12/05 By Profit & Loss a/c 89,100
  Total   89,100   Total   89,100
               

The Profit and Loss a/c would straight away reveal the information that there is Net Profit and has been transferred. The Capital a/c or the Profit and Loss Appropriation a/c would reveal the information that Net Profit has been received by transfer.

» To/By Net Loss

The Net Loss from the Profit and Loss a/c is transferred to the Net Loss a/c and from there to the Capital a/c or the Profit and Loss Appropriation a/c.

By using this additional account we can ensure that the postings would read By Net Loss in the Profit and Loss a/c and To Net Loss in the Capital or Profit and Loss Appropriation accounts.

Journal/Ledger » Hide/Show

Journal in the books of M/s Razmataz Chemicals for the period from ___ to 31st December 2005
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
1st to 30th Dr
1,35,750
1,35,750
[For the transfer of the net loss to the Net Loss account.]
1st to 30th Dr
1,35,750
1,35,750
[For the transfer of the net loss from the Net Loss account to the profit and loss appropriation account.]
DrNet Loss a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
31/12/05 To Profit & Loss a/c 1,35,750 31/12/05 By P/L Appropr. a/c 1,35,750
  Total   1,35,750   Total   1,35,750
               
The Profit and Loss a/c would straight away reveal the information that there is Net Loss and has been transferred. The Capital a/c or the Profit and Loss Appropriation a/c would reveal the information that Net Loss has been received by transfer.

Net Profit a/c, Net Loss a/c » Control accounts

 
 

• Control Accounts

Accounts which are created and closed instantaneously and whose sole purpose is to enable the derivation of greater information are called "Control Accounts".

Use of Controlling accounts is a procedure that we adopt frequently in accounting.

• Manual Accounting

In manual accounting, we just assume the presence of such accounts and use the useful phrases wherever needed. We do not record the journal entries relating to these and carry on posting as if we have recorded the journal.

• Computerised Accounting

If you intend to make use of such a facility in computerised accounting, care should be taken to ensure that all the relevant controlling accounts are created and the required journal entries are passed.

Profit & Loss Appropriation a/c » Special Nominal account

 
 

• A Nominal Account

If Profit & Loss Appropriation a/c is maintained, the Net profit or loss revealed by the Profit and Loss a/c in every accounting period is transferred to that account. Thus the accumulated balance in the Profit & Loss Appropriation a/c also indicates either a profit or loss which qualifies it to be called a nominal account.

All the nominal accounts are closed at the end of the accounting period by transfer to either the Trading a/c or the Profit and Loss a/c as the case may be.

However, the Profit & Loss Appropriation a/c, though a nominal account is not closed. The balance in that account is carried over to the subsequent accounting periods just like balances in the case of Real or Personal accounts.

With regard to this characteristic, the Profit & Loss Appropriation a/c is a special account.

• Special Nominal Accounts

Nominal accounts which are not closed at the end of the accounting period and whose balances are carried forward from one accounting period to another as "Special Nominal accounts". Balances of these accounts, appear in the balance sheet along with the other Real and Personal account balances.
Author Credit : The Edifier ... Continued Page 8

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