How to close revenue and expense accounts

Financial Statements of a Sole Proprietorship without Adjustments

What you need

• A checked Trial Balance showing the revenue account balances (e.g. Commission Received) and expense account balances (e.g. Salaries).
• The gross profit brought down (gross profit b/d) from the Trading Account.
• The ledger containing each revenue and expense account so closing entries can be recorded.
• A basic understanding of the double-entry rules (debit and credit).

Step by step

1. 1

   Identify the revenue and expense accounts

   Refer to the Trial Balance of Perniagaan Setia as at 31 December 2025 and separate the revenue accounts from the expense accounts. Revenue accounts (credit balances): Commission Received RM1,200, Discount Received RM300 and Interest Received RM500. Expense accounts (debit balances): Salaries RM8,000, Rent RM3,600, Utilities RM1,400 and Insurance RM600. Remember that Sales is not included here because it is transferred to the Trading Account.

2. 2

   Open the Profit and Loss Account and bring in gross profit

   Open the Profit and Loss Account in the ledger. Transfer the gross profit brought down RM20,000 from the Trading Account to the credit side. The entry is: Debit Trading Account RM20,000; Credit Profit and Loss Account RM20,000 (gross profit b/d).

3. 3

   Close revenue accounts to the credit side of the Profit and Loss Account

   For each revenue account, debit that revenue account and credit the Profit and Loss Account. Example: Debit Commission Received RM1,200; Credit Profit and Loss Account RM1,200. Repeat the same entry for Discount Received RM300 and Interest Received RM500. Each revenue account balance now becomes zero.

4. 4

   Close expense accounts to the debit side of the Profit and Loss Account

   For each expense account, debit the Profit and Loss Account and credit the expense account. Example: Debit Profit and Loss Account RM8,000; Credit Salaries RM8,000. Repeat for Rent RM3,600, Utilities RM1,400 and Insurance RM600. Each expense account balance is now zero.

5. 5

   Total both sides of the Profit and Loss Account

   Total the credit side: gross profit RM20,000 plus total revenue (RM1,200 + RM300 + RM500 = RM2,000), giving RM22,000. Total the debit side: total expenses (RM8,000 + RM3,600 + RM1,400 + RM600) = RM13,600.

6. 6

   Determine the net profit or net loss

   Compare the two sides. Since the credit (RM22,000) exceeds the debit (RM13,600), the business earns a net profit of RM22,000 − RM13,600 = RM8,400. The net profit is entered on the debit side of the Profit and Loss Account as the balancing figure so both sides total RM22,000.

7. 7

   Transfer the net profit to the Capital Account

   Record the closing entry to transfer the profit to the owner: Debit Profit and Loss Account RM8,400; Credit Capital Account RM8,400. If the result is a net loss instead, the entry is reversed: Debit Capital Account; Credit Profit and Loss Account.

8. 8

   Check that all accounts are properly closed

   Confirm that every revenue and expense account now has a zero balance, that the Profit and Loss Account balances, and that the net profit RM8,400 is shown as an addition to capital in the owner's equity section of the Statement of Financial Position. This RM8,400 must match the net profit in the Income Statement.

Second example

Kedai Harmoni closes its accounts on 31 December 2025. The gross profit brought down is RM5,000 and the only other revenue is Rent Received RM800, so the credit side of the Profit and Loss Account totals RM5,800. Its expenses are Salaries RM4,500, Advertising RM1,200 and Depreciation of Fittings RM1,600, totalling RM7,300. Because the debit side (RM7,300) exceeds the credit side (RM5,800), the business makes a net loss of RM1,500. The closing entry is Debit Capital Account RM1,500; Credit Profit and Loss Account RM1,500. This net loss is deducted from the owner's capital in the Statement of Financial Position, unlike a net profit which increases capital.

Common mistakes

Related chapter: Financial Statements of a Sole Proprietorship without Adjustments →

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