EXERCISE IX. CLOSING THE LEDGER. 104. The purpose of this exercise is to illustrate the method of closing the accounts showing losses and gains, in order to transfer the net loss or gain to the proprietor's account. The gains belong to the proprietor, and when the gains exceed the losses, his capital in the business is increased by the amount of the net gain. On the other hand, losses reduce the amount of the proprietor's capital, and when the losses exceed the gains, his capital is decreased by the amount of the net loss. It is customary in business to close the various accounts showing losses and gains at least once a year, so that the proprietor's account may show whether his interest in the business has been increased or decreased by these losses and gains. 105. There are certain preliminary steps before beginning to close the ledger: 1. Take a trial balance. 2. Take an inventory. 3. Prepare a statement of losses and gains. 4. Prepare a statement of resources and liabilities. Inventory, Jan. 31,1908. The illustrations for this exercise are based on the model ledger on pages 68 and 69. You have already taken a trial balance for the February transactions, and you may now take an inventory for February, as directed in § 35. You have learned that the value of your merchandise is to be estimated at cost prices. The illustration on the preceding page, which is based on the transactions of the model journal on pages 60 and 61, will serve as a model. 106. Statement of Losses and Gains. - You may prepare a statement of the losses and gains shown by your ledger at the close of February. Your net gain should be $144.26. The following illustration, which is based on the model ledger on pages 68 and 69, will serve as a model. If you have any difficulty in understanding this statement, read again §§ 36, 88, and 90. 107. Statement of Resources and Liabilities. You invested $1000, and, as the statement of losses and gains shows a net gain for February of $144.26, you should now be worth the sum of these two, or $1144.26. You may prepare a statement to show whether or not you are worth Statement of Resources Liabilities, Cash Resources on hand Resources Liabilities 100360 Merchandise perinventory 33625 1250 on acct. 185 Geo. W. Balch owes on acct. Bills Payable unpaid 38750 net gain 149.85 present worth 114985 15375 کی 533733 *To be written in red ink. The Proof. Notice the manner of proving the above statement. proprieter invested $1000, and the statement of losses and gains shows a net gain of $149.85, therefore he should now be worth $1149.85. If this sum did not agree with the difference between his resources and liabilities, it would indicate an error, which should be found at once. A Resource is any property belonging to the business or any debt owing to the business. A Liability is any debt which the business owes to any one else. The Present Worth of the business is the excess of the resources over the liabilities. When the liabilities exceed the resources, the business is insolvent, and the difference is called the net insolvency. 108. The Balance Sheet. The two statements which you have just prepared may be combined in the form of a balance sheet like the illustration shown on page 75, and you may prepare a similar balance sheet to show the condition of your business at the end of February. In this form of the balance sheet the names of the accounts are arranged at the left, as in the trial balance, and the first two columns show the debit and credit footings of the ledger. The ledger balances might have been used instead of the footings. The inventories are entered in red ink in the resource column, because, unlike the other resources, they are not found by taking the differences between the debit and credit footings. Losses and resources are entered in the third and fifth columns, because they represent debit balances; and gains and liabilities are entered in the fourth and sixth columns, because they represent credit balances. Balance Sheet Jan:31,1908. Credit Losses Gains Resources Liabilities 38750 114985 1 5 3 7 3 5 1 5 37 35 *To be written in red ink. The proprietor's Net Credit is the difference between the two sides of his account. His Present Worth is found in two ways: first, by adding the net gain to his net credit; second, by subtracting the liabilities from the resources. The form of balance sheet shown above is one of several forms used by bookkeepers. It is especially adapted to the needs of a small business; for it gives very concisely all desired information. For illustrations of more complicated balance sheets, it is suggested that you obtain copies of the annual reports of railroad companies or of other large corporations, or consult the reports of national banks as published in the papers. Many business men prefer separate statements of losses and gains, and resources and liabilities, similar to those shown on pages 73 and 74. 109. Classes of Accounts. Bookkeeping is largely a process of classification; when the transactions are first recorded, they are classified into accounts; and later, when a statement is prepared, these accounts are classified into two groups, one showing Resources and Liabilities, and the second showing Losses and Gains. The first group shows the condition of the business, and the second group the results of the business. 110. Closing the Ledger. The next step is to close the accounts showing losses and gains, in order to make the ledger show the net loss or gain and the Present Worth of the proprietor. This is done by first transferring the several losses and gains to a new account, called the loss and gain account, and then transferring the net loss, or net gain, to the proprietor's account. The accounts showing losses and gains should be closed in the order in which they occur in your ledger. You may use your copy of the model ledger and close the accounts in the manner explained in the following sections, and illustrated on pages 77 to 80. 111. Closing Merchandise Account. This was fully explained in § 37; the several steps should always be taken in the following order: 1. Enter the value of the goods on hand on the credit side in red ink, using for explanation, Inventory. 2. After the amount of the inventory has been added to the credit footing, enter the difference between the two sides on the smaller side in red ink, using for explanation, Loss or Gain, be indicated by the account. as may 3. Rule the account. 4. At this point the debit and credit footings should be the same, and you may enter the footings in black ink between the rulings. 5. Bring down the Inventory below the rulings on the debit ̧side in black ink. This entry should have the date of the next business day. 6. Carry the Loss or Gain to the opposite of the loss and gain account in black ink, using for explanation, Merchandise. 7. Each entry that you make in closing an account should include the date of the entry. |