Question

Anchor Ltd is preparing its financial statements. After transferring the balances on all the income and expense ledger accounts to the profit and loss ledger account, the total credits in the profit and loss ledger account exceed the total debits by £4,000.

Which two of the following statements about Anchor Ltd are correct?
A Anchor Ltd has made a loss for the year of £4,000.
B Anchor Ltd has made a profit for the year of £4,000.
C To begin to calculate the closing capital account balance, Anchor Ltd should credit the capital account and debit the profit and loss ledger account with £4,000.
D The opening balance on the profit and loss ledger account for the next reporting period is £4,000 credit.
E The closing balance on the profit and loss ledger account of £4,000 should be deducted from the capital account to give the profit for the year.

Answer 1

Anchor Ltd has made a profit of £4,000 for the year, and this amount should be credited to the capital account while debiting the profit and loss ledger account. The correct statements are B and C.

Step-by-step explanation:

When the total credits in the profit and loss ledger account exceed the total debits by £4,000, this indicates that Anchor Ltd has made a profit for the year of £4,000. Therefore, the correct statements are:

• B) Anchor Ltd has made a profit for the year of £4,000.
• C) To calculate the closing capital account balance, Anchor Ltd should credit the capital account and debit the profit and loss ledger account with £4,000.

Statement A is incorrect because the excess of credits over debits represents a profit, not a loss. Statement D is also incorrect, as the profit for the year is closed into the capital account, and the profit and loss account does not carry a balance into the next period. Lastly, statement E is incorrect since the profit is added to, not deducted from, the capital account.