When to Close an Account and When to Carry the Balance Forward

One problem that many students encounter when completing extended trial balance is whether to close off an account to the Profit and Loss account or whether to carry the balance forward but record it on the balance sheet.

The secret really is in the name! The profit and loss account is an account. It is part of the double entry. The balance sheet is not the balance sheet account. It is simply a record of balances. So look at the nature of the ledger account and decide whether the account needs to be closed. For example expense accounts need to be closed. For the profit figure to be calculated correctly we must include all the wages paid in that year. So it is closed off by transfer to the P & L (the double entry being Cr. Wages, Dr. P & L).

Where a balance needs to be retained, for example on cash, you do not close the account. You simply carry the balance forward to the next trading period. That is the whole of the bookkeeping. The only other point is to make sure that you make the appropriate entry on the balance sheet but this is not part of the double entry.

You will get these things wrong at first. We all did! With practice, however, it will become second nature. One good thing is to look at the “skeletons” of the P & L and the balance sheet. Try to memorise where everything goes and how the different categories are grouped. Even in consolidated accounts of listed PLCs the format is always recognisable.