Transferring Balances to the Income Statement (Cambridge (CIE) O Level Accounting)

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 capital 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

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

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 capital account

  • Debit the capital account if it is a loss

  • Credit the capital account if it is a profit

• The total capital can be calculated at the end of the year:

  • Transfer the balance on the drawings account to the capital account

    • This will be a debit entry

  • Balance the capital account