Extended trial balance

readerreader Experienced MentorPosts: 1,039MAAT, AAT Licensed Accountant
Hello everybody

Why do the accounts that form part of the P&L A/c have to be 'emptied' before posting into the ETB, while the accounts that form part of the balance sheet do not have to be emptied?

I know that the accounts that form part of the P&L A/c are part of the double entry system, while the balance sheet accounts are not part of te double entry system, but why is this?

Comments

  • sharonjsharonj Well-Known Posts: 166Registered
    Hi

    I think it is because the accounts that relate to the p and l account are any costs and revenue for that given year. The balance sheet accounts do not need to be cleared to nil as they are an ongoing record of the value of the business.

    There is probably a much better explanation than this but this is what I think the reasoning behind it is.
  • readerreader Experienced Mentor Posts: 1,039MAAT, AAT Licensed Accountant
    Thanks Sharon- your answer makes sense to me
  • sdvsdv Experienced Mentor Posts: 585Registered
    Good answer Sharonj.

    May I expand on that answer?

    I believe the answer lies in the heading of the profit and loss account, and applying the accruals concept.

    P&L Heading;- “profit and loss account FOR THE YEAR ENDING (PERIOD) 31st December.”

    All the accounts that are transferred into P&L accounts, show income and expenses for the specified accounting period (1st Jan to 31st December). Any under or over expenses are transferred from or to Accruals and Prepayment accounts. Therefore at the year end there is no balance left in the account to carry down or forward. Thus the account is closed.

    However, at the start of the year when accruals and prepayments journals are reversed; there is an opening balance on the income and expense accounts.

    The balances shown on the BALANCE SHEET are part of the double entry, but the ASSET or the LIABILITIES are EXPENSES for more then one accounting period.

    Motor Cars are used for more then a year;
    Building certainly lasts more then a year.

    Bank Loans are repayable for more then a year

    Therefore at year end the accounts are not closed, but the balances are carried forward into the next year.

    Hope this helps but any improvement on the above explanation is welcomed.
  • readerreader Experienced Mentor Posts: 1,039MAAT, AAT Licensed Accountant
    I've just finished studying "Trading and Profit and Loss Account". At the bottom of the page the books says that net profit is subject to taxation. Does anyone have a link that I can click on so that I can find out about the percentage rate of taxation on net profit.
  • readerreader Experienced Mentor Posts: 1,039MAAT, AAT Licensed Accountant
    I've just found out that:

    "Partnerships and sole traders do not pay corporation tax, but rather are subject to income tax and capital gains tax."

    http://www.thetaxguide.co.uk/CuttingYourCorporationTaxLiabilityThroughExpenses.html

    So I guess I am looking for a web-page(s) on income tax and capital gains tax (what are these taxes?, what are they for?, and what is their percentage rate?).
  • readerreader Experienced Mentor Posts: 1,039MAAT, AAT Licensed Accountant
    I just found out that:

    "In the case of individuals, income tax is calculated as a percentage of annual gross income"

    http://www.thetaxguide.co.uk/WhatisIncomeTax.html

    So is income tax calculated on gross profit or net profit figure on the P&L A/c?
  • readerreader Experienced Mentor Posts: 1,039MAAT, AAT Licensed Accountant
    I just found out about capital gains tax:

    http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/DG_4016313

    It's a tax (18%, first £10,100 exempt) on the sale of a business asset worth more than £6K that has increased in value.
  • readerreader Experienced Mentor Posts: 1,039MAAT, AAT Licensed Accountant
    Is NI also paid on net profit (or gross profit)? Does self-assessment take care of both income tax (PAYE) and NI, or just income tax?
  • Bookworm55Bookworm55 Trusted Regular Posts: 479Registered
    reader wrote: »
    I've just finished studying "Trading and Profit and Loss Account". At the bottom of the page the books says that net profit is subject to taxation. Does anyone have a link that I can click on so that I can find out about the percentage rate of taxation on net profit.

    Don't try to do too much at once, or you will get in a mess. Tax is moderately complicated. At AAT Intermediate, all you have to worry about is how to put it in the accounts.

    Companies pay corporation tax on their (net) profits, and capital gains they have made. There are a number of adjustments to be made to get from net profit to taxable profit. You can worry about it if you choose to do the Business Tax unit.

    Individuals pay income tax on their wages, salaries and pensions income, and their profit from sole trader businesses. They also pay capital gains tax on capital gains. Again, you can worry about it if you choose to do the Personal Tax unit.

    Employers and employees pay National Insurance Contributions based on their (the employee's) wages and salaries. I can't remember how much NI is in the Intermediate level, but I think it comes up.
  • readerreader Experienced Mentor Posts: 1,039MAAT, AAT Licensed Accountant
    Thanks for the advice bookworm- I can't wait until I complete intermediate; advanced AAT seems more interesting.
  • steveJsteveJ Experienced Mentor Posts: 694Registered
    Same here reader. Im about to book uo for my FRA exam and cant wait to get to technician stage.
    Sometimes this does seem like a big jump from the foundation, but ill get there.
    Have you started incomplete records yet ?
  • readerreader Experienced Mentor Posts: 1,039MAAT, AAT Licensed Accountant
    Sounds like you're ahead of me, stevej.

    I'm not on incomplete records yet, is it hard?
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