After the adjusting entries have been made and posted to the ledger the closing entries are made. Since the transactions and facts which affect the net worth or proprietorship have been recorded under various nominal accounts, it is necessary to combine these in order to obtain the net increase or decrease in the proprietor's interest. The closing entries are made to trans fer or close out to a temporary account, called the profit and loss account, the sundry debit and credit balances of these nominal or proprietor ship accounts. The balance of this profit and loss account is then closed into the proprietor's account.
After the closing entries are made, another trial balance, the proof trial balance, is drawn off to prove the final equilibrium of the ledger. Since the nominal accounts have all been closed into the proprietor's account, the proof trial balance contains only asset and liability ac counts and the net worth. And since the net worth was obtained independently and must equal the balance of the assets and liabilities, a check on the records is furnished which is the fundamental characteristic of double entry.
Balance A balance sheet is a state ment of the assets, liabilities and net worth of a business at a specified time, compiled from a set of double entry books, which are in balance after the books have been closed. (See illus tration No. 4). It is the final expression of the fundamental equation after its terms have been affected by the transactions of a financial period. In content it does not differ from the proof trial balance. The difference between a trial balance and a balance sheet is that a trial balance is taken from the ledger before the nominal accounts have been closed; a balance sheet is taken from the ledger after the nom inal accounts have been closed. There are sev eral standard methods of arrangement of bal ance sheets. In the account form (as shown), one method is to list the assets on the left, in the order of their permanence, fixed assets, quick or current assets and deferred debit items; the liabilities follow a similar order on the right side, capital, secured liabilities, current liabili ties, deferred credit items. A second method is almost the reverse of the first, the assets and liabilities running from the most current to between the two balance sheets. The profit and loss statement must not be confused with the profit and loss account, which is a summary account in the general ledger, although in its more primitive form it may be constructed from the profit and loss account and not differ much from it. Usually the statement is prepared
from the nominal accounts. Their balances are classified and arranged so as to distinguish the various sources of the_profits and income and to show the amount and nature of each kind of loss or expense. The profit and loss statement may be exhibited in either the account or the ((report form"' and is often divided into different sections, as manufacturing section, trading sec the most permanent. English methods of ac counting regard the balance sheet as a state ment of account rendered by the business to the proprietor and place the liabilities and capital on the left with the assets on the right.
The ((report form" of balance sheet consists of a list of the assets, usually on journal-ruled paper, with the total carried into the second amount column, followed by a list of the liabili ties, the total of which subtracted from the total assets gives the net worth at the bottom. This form is becoming popular because more easily undersood by those unfamiliar with accounts.
A balance sheet must be distinguished from a statement of assets and liabilities, although they may be exactly alike in form. The latter may be prepared from single entry or any rec ords or no records at all, while a balance sheet can be prepared only from a set of double entry books.
Profit and Loss Statement.— The profit and loss statement, sometimes called income or revenue statement, or loss and gain statement, is a classified and detailed arrangement of the income and profits made and the expenses and losses incurred during a given period. It is of equal importance and a necessary supple ment to the balance sheet. The balance sheet shows the status of the business at a certain moment of time, it is a cross section, as it were, of the business at that moment. The profit and loss statement, on the other hand, covers a whole period of time between two successive balance sheets. It shows the result of all the factors which have been operating during that period and explains the difference tion, administrative section and profit and loss section. (See illustration No. 5).