How to Calculate the Net Profit of a Company and Adjust the Entries for the Closing Inventory
Calculating your company's net profit and adjusting the general ledger for the closing inventory are necessary steps in the accounting cycle to prevent internal accounting errors that could carry into the next fiscal year. When closing your accounting books, check the final book numbers against the actual inventory and cash on hand at your company. If the balances are not equal, trace any errors back to the balance sheet or re-examine your invoices.
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Instructions
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Net Profit
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Add all of your revenue for the fiscal period by examining your receipts and invoices. Revenue is the total amount you receive for selling products or services. For example, if you sell computers for $300 each, and you sold 100 computers for the year, $30,000 is your total revenue.
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Calculate your cost of goods sold for the fiscal period. The cost of goods sold is the amount you spend to produce or buy each inventory item. For example, if you sell 100 T-shirts that cost $5 a piece at wholesale, your cost of goods sold is $500.
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Total all of your company's operating expenses. Operating expenses include every expense you incur to conduct business. For example, employee wages, the rent for your building and your energy bill are operating expenses.
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Subtract your cost of goods sold and total operating expenses from your company's total revenue for the fiscal period. The result is your profit before taxes. Your company's net profit is calculated after subtracting taxes, which vary each fiscal year. If you are a sole proprietor, multiply your income before taxes by 0.35 and subtract that amount from the income before taxes. This is a rough estimate of your net profit.
Closing Inventory
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Create a "Trial Balance" t-chart for your inventory account and write your starting inventory amount in the "Debits" column. The "Trial Balance" t-chart is generally written in a general accounting ledger.
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Add all of the inventory invoices and receipts for your company for the fiscal year. Create an "Adjustments" t-chart and add this amount to the "Debits" side of the chart. Write the amount from the "Debit" side of the inventory trial balance t-chart into the "Credit" side of the "Adjustments" t-chart.
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Create an "Adjusted Trial Balance" t-chart and enter the "Debit" amount from the "Adjustments" t-chart into the "Debit" side of the "Adjusted Trial Balance" t-chart. This entry shows the positive inventory that flowed into your business.
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Enter the "Debit" amount from your "Adjusted Trial Balance" t-chart into the "Debit" column of the "Balance Sheet" t-chart for your inventory account.
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Write the beginning inventory amount for your company in the "Debit" column of your "Income Summary" section in the general journal. In the "Ending Inventory" row of your "Income Summary" section, enter the amount from the "Debit" column of your inventory balance sheet into the "Credit" column. This entry accounts for the money spent on acquiring additional inventory.
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References
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