At the end of the fiscal year, however, the book keeper makes all the adjustments which were made prior to the preparation of the financial statement, and records these adjustments on his books. Thus, his books will show exactly the same information that is given in the financial statements. He then proceeds to group the economic accounts in the same form in which they are grouped in the statements themselves. He will carry: first, a manufacturing account; sec ondly, a trading account, and thirdly, a profit-and loss account. He must consider the same factors that were taken up in our deduction of the financial state ments. He may, at times, prepare departmental profit-and-loss accounts, as well as a summary ac count.
8. Methods of closing.—The various adjustment entries, the transfers from the economic accounts to the summary accounts, and the transfer of the balance in the summary accounts to the proprietor's account, should not be made directly from account to account in the ledger. They should be expressed by means of properly explained journal entries. The use of this method will safeguard against improper manipu lation of accounts to conceal frauds or embezzlements, and will assist the auditor in ascertaining whether or not there have been any such improper manipulations. It will aid too, in increasing the accuracy with which these transfers are made.
9. Working sheet.—The work of closing must be done systematically in order to prevent errors and oversight. Probably the best procedure in preparing to close the books is to make use of a working sheet as on page 170. All the adjustments appearing in the adjustment column, are first recorded and in the case illustrated, give rise to the following entries in the journal: Direct wages $3,000 Factory, light, heat and power 1,000 Taxes on land and buildings 500 Commissions 3,000 Office salaries . 800 Interest on mortgage 375 To Accrued expenses payable $8,675 Sales $4,800 To Reserve for bad debts $4,900 Manufacturing account $3,202 To Reserve for depreciation on plant and machinery $2,250 Reserve for depreciation on land and buildings 952 Depreciation of furniture and fixtures $600 To Reserve for depreciation on furniture and fixtures $600 In every case we must give appropriate explana tion of what these entries cover. At the beginning of the next year, such entries as are purely estimates may be reversed, as the charges will come thru in the regular course of business. When the accrual ac
counts, for instance, remain on our books, payments of the items included therein would be charged against the accrual account.
10. Prepaid do not make an entry cov ering the prepaid expenses. The total of these ex penses is already on our books, and in transferring those accounts to our profit-and-loss account, we need take up as expenses only the consumed portion, leav ing the balance to be carried forward as an expense of the ensuing year.
11. Closing out the economic that we have made all the necessary adjustments, we need only transfer the different economic accounts to the various divisions of "profit and loss" which have been set up. The first entry would be: 12. Discussion of these entries.—The reader will note that by means of these entries we have trans ferred every economic accounE to its appropriate divi sion of the profit-and-loss account. After having accumulated the cost of manufacturing, we transfer that to the debit of the trading account. Here we sell a definite amount of goods at a certain expense, and account for the balance of the goods manufactured by our inventory at the end. These entries are, in effect, a duplication of our statements of income and of profit and loss, given on page 212.
It is sometimes the custom to make an entry credit ing all the assets and charging all the liabilities at the end of each year. At the beginning of the ensuing year, this entry is made in the reverse form, putting the assets back on our books with a new balance. There seems to be no good reason for reversing the entry, beyond the fact that it proves the accuracy with Which the books have been closed out. The closing and opening entries must balance, just as our balance sheet must balance. If we prepare a trial balance of our ledger after closing, and compare this with our balance sheet, we would find the two to be identical. If this condition does exist, we may close each ac count out by writing in the word "balance," and bring ing down a new balance at the beginning of the next year. A trial balance of these new balances would then be checked against our balance sheet as proof of their accuracy.