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Hi there,
When preparing accounts for sole traders (no bank reconciliation, just income/expenses), having posted all entries for the year, I would automatically assign the balancing debit or credit against either drawings or capital introduced, (the profit/loss for the year being automatically allocated by the software).
This balancing figure doesn't necessarily clear the profits in any given year however, as other year end adjustment's (such as opening / closing stock) affect the final profit, and over time this has created a growing capital account for some clients due to apparent retained profits.
I can't think of how to clear this though, even if the capital account was cleared with 'drawings', any credit entry would be inappropriate in the accounts, creating either additional income or a liability.
Can anyone shed any light on this, or perhaps it isn't something that needs to be adjusted, in which case how it would be best described to a client should they ever ask what the reserves in the business represent?
Many thanks for anyone's thoughts,
AJ
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