AccountsISC Class 11 · Ledger

Closing and Adjusting Entries in the Ledger: ISC Class 11 Accounts

Updated 17 October 2026 · Fact-checked

Adjusting entries bring the accounts up to date at the year end for outstanding, prepaid, accrued and advance items and depreciation. Closing entries then transfer the balances of nominal accounts: purchases, sales, returns, direct expenses and stock to the Trading Account, and indirect expenses and incomes to the Profit and Loss Account. The balances of real and personal accounts are carried forward.

Nominal accounts close into Trading, then Profit and Loss, then Capital (less drawings); real and personal balances are carried forward.

Illustration drawn for QuestionBuddy.

Understand Closing and Adjusting Entries: Transfer to Trading and Profit and Loss Account

Adjusting entries (before closing).

Outstanding expense: Expense A/c Dr, To Outstanding expense A/c (liability).
Prepaid expense: Prepaid expense A/c Dr (asset), To Expense A/c.
Accrued income: Accrued income A/c Dr, To Income A/c.
Income received in advance: Income A/c Dr, To Income received in advance A/c.
Depreciation: Depreciation A/c Dr, To Asset A/c (or Provision for depreciation).
Closing stock: Closing Stock A/c Dr, To Trading A/c.

Closing entries.
1. Opening stock: Trading A/c Dr, To Stock A/c.
2. Purchases (net of returns) and direct expenses: Trading A/c Dr, To Purchases, Wages, Carriage inwards.
3. Sales (net): Sales A/c Dr, To Trading A/c.
4. Gross profit or loss: Trading A/c Dr, To Profit and Loss A/c (profit), or reverse.
5. Indirect expenses: Profit and Loss A/c Dr, To each expense.
6. Incomes: each income A/c Dr, To Profit and Loss A/c.
7. Net profit: Profit and Loss A/c Dr, To Capital A/c (or net loss the other way).
8. Drawings: Capital A/c Dr, To Drawings A/c.

Treatment in the ledger. After closing, the nominal accounts show nil balance. Closing stock appears as a debit balance (asset) carried to the next year, along with the adjusting accounts.

Why adjust before closing? Otherwise profit would not match the period's expenses and revenues.

Rent account example. Rent paid Rs 24,000; outstanding Rs 4,000. Rent account: Dr: bank 24,000, outstanding 4,000 = 28,000. Cr: transfer to Profit and Loss 28,000.

Closing and Adjusting Entries: Transfer to Trading and Profit and Loss Account: key facts

Expense account closing: Expense to P&L = Paid + Outstanding - Prepaid | Opening items adjusted; Total transferred.
Trading transfer: Trading Dr: opening stock + net purchases + direct expenses | Trading Cr: net sales + closing stock; Balance is gross profit.
Capital update: Capital Cr: net profit | Capital Dr: drawings and net loss; Closing capital.

How to answer Closing and Adjusting Entries: Transfer to Trading and Profit and Loss Account questions

Adjust, then close in the order Trading, Profit and Loss, Capital.

1Pass adjusting entries for each item given.
2Transfer direct items to the Trading Account and find gross profit.
3Transfer indirect expenses and incomes to the Profit and Loss Account and find net profit.
4Transfer net profit and drawings to the Capital Account.

Closing and Adjusting Entries: Transfer to Trading and Profit and Loss Account in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Outstanding rent

Suppose a shop pays Rs 2,000 monthly rent but the month of March is unpaid at year end.

How is the rent account closed?

Try it first, then show the solutionSolution

Paid 11 x 2,000 = 22,000; add outstanding 2,000.
Rent for the year = 24,000 is transferred to Profit and Loss.

Answer: Rs 24,000 to Profit and Loss; Rs 2,000 carried as a liability.

Memory hook: Expense of the year, not the cash paid.

Tricks to remember Closing and Adjusting Entries: Transfer to Trading and Profit and Loss Account

Short memory aids. Say each one aloud once, then use it on a question the same day.

Adjust then close
Adjusting entries first, closing entries second.
Use it when: Sequence.
Nominal zero
After closing, all nominal accounts are nil.
Use it when: Check.
Trading, P&L, Capital
Three-step transfer.
Use it when: Order.

Closing and Adjusting Entries: Transfer to Trading and Profit and Loss Account: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Adjusting entry · 1 mark · MCQBoard level

Rent prepaid Rs 3,000 is recorded as:
(a) Prepaid rent Dr, To Rent (b) Rent Dr, To Prepaid rent (c) Cash Dr, To Rent (d) Rent Dr, To Cash

Try it first, then show the solutionSolution

Prepaid rent is an asset debited; rent is credited to reduce the expense.

Answer: (a) Prepaid rent Dr, To Rent

Example 2: Adjusting entries · 5 marks · Short answerBoard level

Pass adjusting entries for: (i) salaries outstanding 5,000; (ii) insurance prepaid 1,200; (iii) commission accrued 800; (iv) interest received in advance 600; (v) depreciation 8,000 on machinery. (5 marks)

Try it first, then show the solutionSolution

(i) Salaries Dr, To Outstanding salaries 5,000.
(ii) Prepaid insurance Dr, To Insurance 1,200.
(iii) Accrued commission Dr, To Commission 800.
(iv) Interest Dr, To Interest received in advance 600.
(v) Depreciation Dr, To Machinery 8,000.

Answer: As listed in the steps.

Example 3: Closing entries and results · 9 marks · Long answerHarder board level

Balances: opening stock 30,000; purchases 3,00,000; purchases returns 10,000; sales 6,00,000; sales returns 20,000; wages 25,000; salaries 60,000; rent 24,000 (outstanding 4,000); commission received 8,000; drawings 40,000; closing stock 45,000; depreciation 10,000. Pass the closing entries and find net profit and the effect on capital of 3,00,000. (9 marks)

Try it first, then show the solutionSolution

Trading Dr: 30,000 + 3,00,000 - 10,000 + 25,000 = 3,45,000; Cr: 6,00,000 - 20,000 + 45,000 = 6,25,000. Gross profit = 2,80,000.
P&L Dr: salaries 60,000 + rent 28,000 + depreciation 10,000 = 98,000; Cr: gross profit 2,80,000 + commission 8,000 = 2,88,000.
Net profit = 2,88,000 - 98,000 = 1,90,000.
Capital = 3,00,000 + 1,90,000 - 40,000 = 4,50,000.

Answer: Gross profit Rs 2,80,000; net profit Rs 1,90,000; closing capital Rs 4,50,000.

Example 4: Adjusted rent account · 5 marks · Long answerHarder board level

Rent paid in the year Rs 36,000; at the start Rs 3,000 was outstanding and Rs 2,000 was prepaid. At the end Rs 4,500 is outstanding and Rs 1,500 is prepaid. Show the Rent account and the amount transferred to P&L. (5 marks)

Try it first, then show the solutionSolution

Dr: opening prepaid 2,000; cash 36,000; closing outstanding 4,500 = 42,500.
Cr: opening outstanding 3,000; closing prepaid 1,500; P&L balance = 42,500 - 4,500 = 38,000.
Check: 36,000 - 3,000 + 4,500 + 2,000 - 1,500 = 38,000.

Answer: Rs 38,000 transferred to Profit and Loss.

Example 5: Missing closing entry · 5 marks · Long answerHOTS / competency

A bookkeeper closed all nominal accounts but forgot to transfer drawings to capital and forgot the closing stock entry. Net profit was shown as Rs 1,40,000 with drawings Rs 25,000 and closing stock Rs 38,000. Find the correct profit and the capital effect if opening capital was Rs 2,50,000. (5 marks)

Try it first, then show the solutionSolution

Closing stock raises gross profit and net profit by 38,000: profit = 1,78,000.
Capital = 2,50,000 + 1,78,000 - 25,000 = 4,03,000.
Without the corrections capital would be 2,50,000 + 1,40,000 = 3,90,000, wrong by 13,000.

Answer: Correct profit Rs 1,78,000; closing capital Rs 4,03,000, against Rs 3,90,000 wrongly shown.

Where students lose marks in Closing and Adjusting Entries: Transfer to Trading and Profit and Loss Account

The slips examiners see most often, and what to write instead.

Mistake: Closing a prepaid expense as an expense
Transferring the whole balance.
Wrong working
P&L Dr 42,500
Right working
P&L Dr 38,000
Do this: Adjust before transferring.
Usually costs: 2 marks.
Mistake: Not debiting drawings to capital
Forgetting the final step.
Wrong working
Capital 4,90,000
Right working
Capital 4,50,000
Do this: Close drawings to capital.
Usually costs: 2 marks.
Mistake: Transferring sales gross
Ignoring returns.
Wrong working
Sales 6,00,000
Right working
Sales 6,00,000 less returns 20,000
Do this: Close net sales.
Usually costs: 1 mark.

Exam tips

Give each closing entry a narration like "being ... transferred to Trading A/c".
Compute gross profit before the Profit and Loss transfer.
End with the closing capital.

Practice questions on Closing and Adjusting Entries: Transfer to Trading and Profit and Loss Account

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
After closing entries, a nominal account shows a balance of:
(a) debit (b) credit (c) nil (d) opening
Hint
Transferred.
Answer
(c) nil
Q2 · 4 marks · Short answerBoard level
List the closing entries needed to transfer the expenses and incomes to the Trading and Profit and Loss Account. (4 marks)
Hint
Direct and indirect.
Answer
Trading A/c Dr, To Opening stock, Purchases, direct expenses; Sales Dr, To Trading A/c; Closing stock Dr, To Trading; Trading balance to P&L; P&L Dr, To indirect expenses; Incomes Dr, To P&L; P&L balance to Capital.
Q3 · 5 marks · Long answerHarder board level
Salaries paid Rs 72,000; outstanding at start Rs 6,000, at end Rs 8,000. Insurance paid Rs 12,000; prepaid at start Rs 1,000, at end Rs 3,000. Show both accounts and the amounts transferred to P&L. (5 marks)
Hint
Total each side.
Answer
Salaries to P&L = 72,000 - 6,000 + 8,000 = 74,000. Insurance to P&L = 12,000 + 1,000 - 3,000 = 10,000.
Q4 · 6 marks · Long answerHarder board level
Sales 8,00,000; sales returns 30,000; purchases 5,00,000; purchases returns 20,000; carriage inwards 10,000; opening stock 50,000; closing stock 70,000; office expenses 80,000; commission received 12,000. Pass the closing entries for Trading and find gross and net profit. (6 marks)
Hint
COGS = 4,70,000.
Answer
COGS = 50,000 + 4,80,000 + 10,000 - 70,000 = 4,70,000. Gross profit = 7,70,000 - 4,70,000 = 3,00,000. Net profit = 3,00,000 + 12,000 - 80,000 = Rs 2,32,000.
Q5 · 3 marks · Short answerHOTS / competency
Explain why closing stock is debited in the closing stock account and credited to Trading A/c, and what would happen to profit if this entry were omitted. (3 marks)
Hint
Cost of goods unsold.
Answer
Closing stock is an asset, debited, and credited to Trading as a deduction from cost of goods. If omitted, the cost of goods sold would include unsold goods, and gross profit and net profit would be understated.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Order of closing?Show answer
Trading, Profit and Loss, Capital.
2.Outstanding expense adjustment entry?Show answer
Expense Dr, To Outstanding expense.
3.What is carried forward?Show answer
Real and personal balances.
4.Drawings close to?Show answer
Capital.
5.Closing stock debit?Show answer
Closing stock account.

Closing and Adjusting Entries: Transfer to Trading and Profit and Loss Account: frequently asked questions

Do I close real accounts?

No, they are carried forward.

Is the adjusting entry in journal proper?

Yes.

What if there is a net loss?

Debit Capital, credit Profit and Loss.

Is opening stock closed?

Yes, to Trading.