Transferring Balances to the Income Statement (Edexcel IGCSE Accounting)
Revision Note
Written by: Dan Finlay
Reviewed by: Lucy Kirkham
Transferring Balances to the Income Statement
Which accounts do I need to transfer to the income statement?
The income statement is part of the double entry system
It is used to calculate the profit or loss for the year
Therefore, the balances for expenses and incomes are transferred to the income statement
Including sales, purchases, sales returns, and purchases returns
Expenses are debited to the income statement
Incomes are credited to the income statement
Accounts for assets, liabilities and equity are not transferred to the income statement
These do not directly affect the profit or loss
How do I transfer a balance on an account to the income statement?
The process is very similar to balancing an account at the end of a month
The main difference is
The balance is not carried down to the next month
It is transferred to the income statement
The account should start the next accounting period with a zero balance
There are a few exceptions
Including accrued and prepaid expenses and income
Here is an example of a wages account
The income statement is being prepared for the year ending 31 May 2024
Wages Account
Date | Details | $ | Date | Details | $ |
2023 Aug 1 |
Bank |
3 000 | 2024 May 31 |
Income Statement |
15 000 |
Nov 1 | Bank | 4 000 | |||
2024 | Bank | 4 500 | |||
May 1 | Bank | 3 500 |
| ||
15 000 | 15 000 |
How do I transfer balances for inventory to the income statement?
The starting balance will be on the debit side
This will be the value of the opening inventory
This will be brought down as the closing inventory from the previous year
At the end of the year
Transfer the balance of the opening inventory to the income statement
Debit the income statement
This is an expense for the current year
Credit the inventory account
The asset is decreasing
Total the inventory account to give a zero balance
Transfer the balance of the closing inventory from the income statement
Debit the inventory account
The asset is increasing
Credit the income statement
This is not an expense for the current year
It will be an expense for the following year
Balance the inventory account and bring down the balance
This will be the value of the closing inventory for the current year
This is the value of the opening inventory for the next year
Worked Example
On 1 April 2023, Hashim had an opening inventory of $4 500.
On 31 March 2024, Hashim had a closing inventory of $3 600.
Prepare the inventory account at 31 March 2024. Balance the account and bring down the balance on 1 April 2024.
Answer
Inventory Account
Date | Details | $ | Date | Details | $ |
2023 Apr 1 |
Balance b/d |
4 500 | 2024 Mar 31 |
Income Statement |
4 500 |
4 500 | 4 500 | ||||
2024 Mar 31 |
Income Statement |
3 600 | 2024 Mar 31 |
Balance c/d |
3 600 |
3 600 | 3 600 | ||||
Apr 1 | Balance b/d | 3 600 |
In which account do I enter the profit or loss?
The income statement will show the profit or loss for the year
This balance is transferred to the equity account
Debit the equity account if it is a loss
Credit the equity account if it is a profit
The total equity can be calculated at the end of the year:
Transfer the balance on the drawings account to the equity account
This will be a debit entry
Balance the equity account
Worked Example
Zabir had $80 000 equity on 1 June 2023. Zabir made a profit of $40 000 for the year ending 31 May 2024. During that year, Zabir took $15 000 from the business for personal use.
Prepare the equity account at 31 May 2024. Balance the account and bring down the balance on 1 June 2024.
Answer
Equity Account
Date | Details | $ | Date | Details | $ |
2024 May 31 |
Drawings |
15 000 | 2023 |
Balance b/d |
80 000 |
2024 May 31 |
Balance c/d |
105 000 | 2024 | Income statement | 40 000 |
120 000 | 120 000 | ||||
2024 | |
105 000 |
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