Key Concepts
At the end of the financial year, two accounts are closed off (transferred) to the Capital account:
- Drawings — the total assets taken out during the year.
- Income summary — a temporary account that gathers all income and expenses at year-end to work out the profit or loss. Its balance (the profit or loss) is transferred to Capital.
| Closing entry | Debit | Credit |
|---|---|---|
| Transfer drawings to Capital | Capital | Drawings |
| Transfer profit to Capital | Income summary | Capital |
| Transfer loss to Capital | Capital | Income summary |
After these transfers, the Drawings account is back to zero and the Capital account shows the owner's updated stake, which is carried forward to the next year.
Year-end housekeeping: empty Drawings into Capital (Dr Capital / Cr Drawings), and empty the Income summary into Capital — profit makes Capital bigger (Cr Capital), a loss makes it smaller (Dr Capital). Both accounts start the new year at zero.
- 1 Mar — Wei Ling pays a further $5,000 into the business bank account.
- 10 Aug — Wei Ling withdraws $3,000 from the business bank account for personal use.
- The business makes a profit of $8,000 for the year ended 31 Dec 20X5.
Required: Record these and close them off to Capital at year-end.
At year-end, two accounts are closed to Capital: Drawings (Dr Capital / Cr Drawings) and the Income summary carrying the profit (Dr Income summary / Cr Capital).
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X5 | |||
| 1 Mar | Cash at bank | 5,000 | |
| Capital | 5,000 | ||
| 10 Aug | Drawings | 3,000 | |
| Cash at bank | 3,000 | ||
| 31 Dec | Capital | 3,000 | |
| Drawings | 3,000 | ||
| 31 Dec | Income summary | 8,000 | |
| Capital | 8,000 |
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 20X5 | ||||
| 1 Jan | Balance b/d | 20,000 Cr | ||
| 1 Mar | Cash at bank | 5,000 | 25,000 Cr | |
| 31 Dec | Drawings | 3,000 | 22,000 Cr | |
| 31 Dec | Income summary | 8,000 | 30,000 Cr | |
| 20X6 | ||||
| 1 Jan | Balance b/d | 30,000 Cr |
After the transfer, the Drawings account is back to zero and starts 20X6 fresh. The Capital account carries forward at $30,000.
Statement of Financial Position as at 31 December 20X5 (extract)
| $ | |
|---|---|
| Owner's equity | |
| Capital ($20,000 + $5,000 + $8,000 − $3,000) | 30,000 |
| $ | |
|---|---|
| Capital, 1 Jan 20X3 | 30,000 |
| Loss for the year ended 31 Dec 20X3 | 2,500 |
| Profit for the year ended 31 Dec 20X4 | 12,000 |
The following events occurred during the two financial years:
| Date | Event |
|---|---|
| 20X3 | |
| 12 Sep | Amy withdrew ingredients costing $350 from inventory for her own use at home. |
| 20X4 | |
| 3 Jan | Amy received office equipment worth $1,200 as a gift and placed it in the bakery for business use. |
| 22 Mar | Amy sold her personal laptop for $1,800 and used the money to pay off a business utility bill. |
| 15 Jun | Amy transferred $4,000 from the business bank account to her personal account. |
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X3 | |||
| 12 Sep | Drawings | 350 | |
| Inventory | 350 | ||
| 31 Dec | Capital | 350 | |
| Drawings | 350 | ||
| 31 Dec | Capital | 2,500 | |
| Income summary | 2,500 | ||
| 20X4 | |||
| 3 Jan | Office equipment | 1,200 | |
| Capital | 1,200 | ||
| 22 Mar | Utilities expense | 1,800 | |
| Capital | 1,800 | ||
| 15 Jun | Drawings | 4,000 | |
| Cash at bank | 4,000 | ||
| 31 Dec | Capital | 4,000 | |
| Drawings | 4,000 | ||
| 31 Dec | Income summary | 12,000 | |
| Capital | 12,000 |
Why 22 Mar counts as two things at once.Amy used her own $1,800 to settle a bill that belongs to the business. Split it into the two things that actually happened: (1) the business used up its electricity and water — a utility expense (Dr Utilities expense); and (2) because Amy paid for it herself instead of the business paying, she has effectively put $1,800 of her own money into the business — a capital contribution (Cr Capital). No business cash moved, so Cash at bank is untouched.
(12 Sep: inventory taken for personal use is drawings. 31 Dec 20X3: Drawings and the year's loss are each transferred to Capital at year-end. 3 Jan: a personal gift brought into the business for business use is a capital contribution. 22 Mar: Amy settled a business bill with her own money, so the business incurred a utility expense and the owner contributed capital. 15 Jun: cash withdrawn to Amy's personal account is drawings. 31 Dec 20X4: Drawings and the year's profit are each transferred to Capital at year-end.)
Note: Drawings are recorded as they happen throughout the year (12 Sep, 15 Jun) — each one on its own date, in its own amount. The account is only closed to Capital once, as a single total, at the financial year-end. The two 31 Dec entries are not new drawings — they are the year's transfer of what had already built up.
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 20X3 | ||||
| 12 Sep | Inventory | 350 | 350 Dr | |
| 31 Dec | Capital | 350 | − | |
| 20X4 | ||||
| 15 Jun | Cash at bank | 4,000 | 4,000 Dr | |
| 31 Dec | Capital | 4,000 | − |
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 20X3 | ||||
| 1 Jan | Balance b/d | 30,000 Cr | ||
| 31 Dec | Drawings | 350 | 29,650 Cr | |
| 31 Dec | Income summary | 2,500 | 27,150 Cr | |
| 20X4 | ||||
| 1 Jan | Balance b/d | 27,150 Cr | ||
| 3 Jan | Office equipment | 1,200 | 28,350 Cr | |
| 22 Mar | Utilities expense | 1,800 | 30,150 Cr | |
| 31 Dec | Drawings | 4,000 | 26,150 Cr | |
| 31 Dec | Income summary | 12,000 | 38,150 Cr | |
| 20X5 | ||||
| 1 Jan | Balance b/d | 38,150 Cr |
Statement of Financial Position as at 31 December 20X3 (extract)
| $ | |
|---|---|
| Owner's equity | |
| Capital ($30,000 − $350 − $2,500) | 27,150 |
Statement of Financial Position as at 31 December 20X4 (extract)
| $ | |
|---|---|
| Owner's equity | |
| Capital ($27,150 + $1,200 + $1,800 − $4,000 + $12,000) | 38,150 |
- In the year ended 31 Dec 20X3, owner's equity fell by $2,850 (from $30,000 to $27,150), caused by the net loss of $2,500 and drawings of $350. No additional capital was contributed.
- In the year ended 31 Dec 20X4, owner's equity rose by $11,000 (from $27,150 to $38,150), because capital contributions of $3,000 ($1,200 + $1,800) and a net profit of $12,000 together outweighed drawings of $4,000.
Closing drawings to the Income summary. Drawings are transferred straight to Capital (Dr Capital / Cr Drawings), not to the Income summary — they are not an expense.
Transferring a loss the wrong way. A profit is Cr Capital (it increases equity); a loss is Dr Capital (it reduces equity). Reversing these is a common slip.
Leaving the Drawings account with a balance. After the year-end transfer, the Drawings account must be back to zero — it starts each new year fresh.