Profit and Loss Carryover: Detailed Guide from A to Z

Explanation of profit and loss carryforward

Carrying over profit and loss is an annual accounting activity that takes place at the end of the accounting period. This is the process by which a business transfers the net profit or loss figures of one accounting period to the next accounting period. This figure is recorded in account 911, helping the business track business performance over periods.

Profit and loss carryforward plays a bridge role between accounting periods, helping businesses:

• Business performance evaluation: Profit and loss transfer is a powerful tool to help businesses accurately evaluate operating performance, thereby making the right business decisions.
• Compliance with legal regulations: According to accounting law, enterprises are required to carry out profit and loss transfer. This not only ensures the accuracy of financial reports but also helps enterprises avoid possible legal and financial risks.
• Basis for preparing financial statements: Profit and loss transfer results are important inputs for calculation and reflection in financial statements such as Business performance report, Balance sheet and Cash flow statement.
• Serving management: Information on profit and loss after transfer provides a comprehensive view of the financial situation of the enterprise, helping managers make effective management decisions.

How to account for profit and loss at the beginning and end of the year

Accounting for profit and loss at the beginning of the year

Account used to transfer profits and losses: Account 421 - Undistributed profit after tax: 

• Account 4211: Undistributed profit after tax of previous year
• Account 4212: Undistributed profits this year

When carrying forward profits and losses, the accountant will record the previous year's profit or loss balance in account 4212. This balance will represent the business results of the entire previous year and will be used as the starting point for calculating the following year's profit.

• If account 4212 has a debit balance, it means that the Enterprise had a loss last year:  

Debit account 4212 (Undistributed profits this year)

Credit account 4211 (Undistributed profit after tax of previous year)

• If account 4212 has a credit balance, it means that the Enterprise made a profit last year:  

Credit account 4212 (Undistributed profits this year)

Debit account 4211 (Undistributed profit after tax of previous year)

Accounting for year-end profit and loss transfer

Before carrying forward profits and losses, periodic accounting is necessary to accurately determine the enterprise's undistributed profit after tax. 

Below are some commonly used closing entries:

• Net sales and service revenue transfer

Debit account 511 – Sales revenue and service provision

Credit account 911 – Determine business performance results

• Carry over cost of goods sold:

Debit account 911 – Determine business results

Credit account 632 - Cost of goods sold

• Carryover of financial revenue and other income:

Debit account 515 – Financial activity revenue

Debit account 711 – Other income

Credit account 911 – Determine business results

• Carry forward financial expenses and other expenses:

Debit account 911 – Determine business results

Credit account 635 – Financial expenses

Credit account 811 – Other expenses

• Carry forward selling expenses:

Debit account 911 – Determine business results

Credit account 641 – Sales expenses

• Carry over business management expenses:

Debit account 911 – Determine business results

Credit account 642 – Sales expenses

• Carry forward current corporate income tax expense

Debit account 911 – Determine business results

Credit account 8211 – Current corporate income tax expense

• Transfer of business results during the period to undistributed profit after tax:

+ Carry forward interest, record:

Debit account 911 – Determine business results

Credit account 421 – Undistributed profit after tax

+ Carry forward losses, record:

Debit account 421 – Undistributed profit after tax

Credit account 911 – Determine business results

Some notes when carrying out profit and loss transfer

• Apply accounting regulations correctly: Carry out transfers in accordance with accounting laws, guiding circulars and current accounting standards. At the same time, always update changes in accounting regulations to ensure accurate accounting.
• Check for accuracy: After the transfer, it is necessary to reconcile to ensure that the Debit balance equals the Credit balance of account 911. Furthermore, it is necessary to ensure that all calculations of revenue, expenses, and taxes have been done accurately and without errors.  
• Clearly classify income and expenses: Classify income and expenses into the correct account types and ensure that no items are double-recorded. 
• Treatment of adjustments: Adjustments arising after the year-end date must be reviewed and adjusted before preparing the financial statements.
• Store all documents: Store all accounting documents related to the transfer process for future inspection and reconciliation. 
• Using accounting software: Choosing the right software: Using specialized accounting software to support the transfer process, minimize errors and increase work efficiency.

Accurate transfer  of profits and losses not only ensures the transparency of financial statements but also serves as an important basis for making investment and development decisions of enterprises .