Transferring Balances to the Income Statement | Accounting for GCSE/IGCSE - Year 11 PDF Download

Transferring Balances to the Income Statement

Which accounts do I need to transfer to the income statement?

• The income statement plays a vital role in the double entry system as it determines the profit or loss for the year.
• Balances related to expenses and incomes, such as sales, purchases, sales returns, and purchase returns, are specifically moved to the income statement.
• Expenses are recorded as debits on the income statement, while incomes are registered as credits.
• Notably, accounts associated with assets, liabilities, and capital remain untouched in this transfer process since they do not directly impact the calculation of profit or loss.

How do I transfer a balance on an account to the income statement?

The process of balancing an account at the end of a month closely resembles other accounting procedures, but with a notable distinction: the balance isn't carried forward to the next month. Instead, it's moved to the income statement.

• Unlike typical account balances, which are forwarded, those at month-end are transferred to the income statement.
• At the start of a new accounting period, the account should ideally commence with a balance of zero, although there are exceptions.
• Exceptions include accrued and prepaid expenses and income.

For instance, let's consider a wages account while preparing the income statement for the year ending on May 31, 2024.

How do I transfer balances for inventory to the income statement?

• The starting balance will be on the debit side. This represents the value of the opening inventory for the accounting period.
• The opening inventory value is carried over as the closing inventory from the previous year.
• At the end of the year, the following steps are taken:
  • Transfer the balance of the opening inventory to the income statement.
  • Debit the income statement and credit the inventory account.
  • Total the inventory account to achieve a zero balance.
  • Transfer the balance of the closing inventory from the income statement.
  • Debit the inventory account and credit the income statement.
  • Balance the inventory account and carry over the balance.
  • This closing inventory balance becomes the opening inventory for the next year.

In which account do I enter the profit or loss?

• The profit or loss for the year is detailed in the income statement.
• This profit or loss is then moved to the capital account.
• If there's a loss, the capital account is debited; if a profit, it's credited.
• At year-end, the total capital is calculated by transferring the balance from the drawings account to the capital account, with a debit entry.
• Finally, the capital account is balanced.