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OVERVIEW Three Principal Uses of a Work Sheet:

This handout deals with last six steps in the accounting cycle. It facilitates the –

1. Preparation of the financial statements,

2. recording of adjusting entries and
Preparation of a Work Sheet 3. recording of closing entries.

After preparation of a trial balance, accountants gather and compile data that need to
be adjusted at the end of the accounting period. At this point, he can already prepare the
financial statements. As a preliminary step, he usually prepares a working paper that
facilitates the preparation of these statements. This working paper is usually called a
work sheet.
The work sheet may contain as many money columns as its use may require. The
simplest is the six-column work sheet. Illustrated on the next page is a ten-column work
sheet for the D’ Fashionista. It is identified by a heading consisting of the following:
(Refer to Annex 1 for Worksheet Illustration)
Preparing Financial Statements
After preparing the work sheet, financial statements can easily be prepared. The
figures shown in the income statement and statement of changes in owner’s equity below,
and the statement of financial position on the next page are taken from the work sheet on
the preceding page.

1. The name of the company. D’ FASHIONISTA

2. The title “Work Sheet”. Income Statement
3. The period covered (as on the income statement). For the Month Ended June 30, 2019

Steps in the Preparation of a Work Sheet: Service Fee

Operating Expenses P 48,000
1. Copy the trial balance as is with amounts contained therein under the first pair Wages Expense P 13,000
of columns. Sewing Supplies Expense 4,500
2. Enter the adjustments (adjustments discussed under the Adjustment Process) in Rent Expense 3,000
the Adjustment columns. Depreciation Expense – Sewing Machine 1,000
3. Enter the account balances as adjusted in the Adjusted Trial Balance columns. Utilities Expense 2,000 (23,700)
4. From the Adjusted Trial Balance columns, extend income statement account
balances to the Income Statement columns, and statement of financial position Profi P 24,300
account balances to the Statement of Financial Position columns. t
5. Total the Income Statement columns and the Statement of Financial Position
columns. D’ FASHIONISTA
6. Get the difference between the debit total and the credit total of the Income Statement of Changes in Owner’s Equity
Statement columns. If the debit total is more than the credit total, the difference For the Month Ended June 30, 2019
represents profit.
7. The difference between the two totals of the Income Statement columns is Louie, Capital, June 1, 2019 P 150,000
placed under the column with a lesser total in order to balance or equalize the Profit for the period 24,300
two columns. Total of the two columns should be equal. Louie, Drawing ( 5,000)
8. The difference is also extended to the Statement of Financial Position columns.
It is placed under the column with a lesser total. The total of the two columns
Louie, Capital, June 30, 2019 P 169,300
should also be equal.

Handout #: 6 Completion of the Accounting Cycle Accounting for Service, Merchandising and
Manufacturing Businesses
Accounting –
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D’ FASHIONISTA Adjusting Entries

Statement of Financial Position
June 30, 2019 GENERAL JOURNAL

Page 4
ASSETS
Date Post
Current Assets:
2019 Description Ref. Debit Credit
Cash P 41,600
Accounts Receivable 10,000 June 30 Rent Expense 53 3,000.00
Sewing Supplies 3,500 Prepaid Rent 14 3,000.00
Prepaid Rent 3,000 To recognize expiration of one month rent.
Total Current Assets P 58,100
30 Sewing Supplies Expense 52 4,500.00
Non-current Assets:
Sewing Supplies 13 4,500.00
Property, Plant & Equipment: To take up sewing supplies used during
Sewing Machine P 120,000 the month.
Accumulated Depreciation ( 1,000)
Total Non-current Assets 119,000
30 Depreciation Expense - Sewing Machine 54 1,000.00
TOTAL ASSETS P 177,100 Ac c u mu la te d De pre c ia tio n - S e win g Ma c h in e 16-A 1,000.00
Purchase of sewing supplies on account.
LIABILITIES
Current Liabilities: 30 Wages Expense 51 1,800.00
Accounts Payable P 1,000 Wages Payable 22 1,800.00
Wages Payable 1,800 To take up accrued wages.
Unearned Revenue 5,000
Total Liabilities P 7,800
OWNER’S EQUITY
Louie, Capital 169,300
Recording of Closing Entries
TOTAL LIABILITIES & OWNER’S EQUITY P177,100
Closing entries are journal entries made at the end of an accounting period to clear
or eliminate the balances of temporary accounts in preparation for the next accounting
period. The work sheet can be used as reference in preparing closing entries.
Recording the Adjusting Entries
An account titled Income Summary is used for summarizing the data for the revenue
Adjusting entries could have been recorded at the time data for adjustments were and expense accounts. It is only opened and then closed at the end of the accounting
compiled. However, it is usually convenient to delay their recording until after the period. Other terms used are: Revenue and Expense Summary and Profit and Loss
preparation of the work sheet and the financial statements. Adjusting entries can simply Summary.
be copied from the work sheet to the general ledger and then posted to the general ledger.
Recording of adjusting entries is illustrated below. Steps in Journalizing and Posting of Closing Entries:

1. Revenue accounts, represented by accounts with credit balances under the

Income Statement columns, are debited, and Income Summary account is
credited for the total.

Handout #: 6 Completion of the Accounting Cycle Accounting for Service, Merchandising and
Manufacturing Businesses
Accounting –
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2. Expense accounts, represented by accounts with debit balances under the Page 5
Income Statement columns, are credited, and Income Summary account is Date Post
debited for the total. 2019 Description Ref. Debit Credit
3. If the credit entry of the Income Summary account is more than the debit entry, June 30 Service Fee 41 48,000.00
the difference represents profit. Income Summary is then debited for the
Income Summary 33 48,000.00
difference and Owner’s Equity or Capital is credited. Profit increases owner’s
To close the revenue account.
equity, hence, the credit entry to the owner’s equity or capital account. If the
debit entry is more than the credit, the difference represents loss. Owner’s
Equity or Capital is then debited and Income Summary account is credited. Loss 30 Income Summary 33 23,700.00
decreases owner’s equity, hence, the debit entry to the owner’s equity or capital Wages Expense 51 13,200.00
account. Sewing Supplies Expense 52 4,500.00
Rent Expense 53 3,000.00
4. Drawing account is used to show reduction of owner’s equity by withdrawals of
cash and other assets made by the owner during the period. At the end of the Depreciation Expense - Sewing Machine 54 1,000.00
accounting period, it is credited for the amount of its balance and the owner’s Utilities Expense 55 2,000.00
equity or capital account is debited for the same amount. To close expense accounts.

5. The closing entries are then posted to the ledger in the usual manner. After the 30 Income Summary 33 24,300.00
closing entries are posted to the ledger, revenue, expense, and drawing accounts Louie, Capital 31 24,300.00
(nominal or temporary accounts) have zero balances. The owner’s equity or
To close the Income Summary account.
capital account is increased or decreased depending on the profit or loss and
withdrawals. Statement of financial position accounts (real accounts) have
balances which are carried forward to the next accounting period. 30 Louie, Capital 31 5,000.00
Louie, Drawing 32 5,000.00
To close the drawing account.
Recording of closing entries is illustrated below.

Balancing and Ruling the Accounts

After posting the closing entries, the ledger accounts must be closed. This is done by
ruling then so that no additional entries can be made after the end of the accounting
period.
Procedures in Balancing and Ruling the Accounts:

A. For nominal or temporary accounts (revenue, expense and drawing accounts) –

These accounts have the same debit total and credit total on each account after
posting the closing entries.

1. Draw a single line across the amount columns immediately below the last
figure in the longer of the two columns and on the same line of the shorter
column.

GENERAL JOURNAL 2. Write the total of each column below the single line.

Handout #: 6 Completion of the Accounting Cycle Accounting for Service, Merchandising and
Manufacturing Businesses
Accounting –
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3. Draw a double line below the totals across all columns except the Items Account: Accounts Re ce ivable Acct. No. 12
columns. Date Post Post
Date 2019
2019 Items Ref. Debit Items Ref. Credit
If an account has only one debit and one credit entry, draw a double line June 10 J-2 20,000.00 June 14 J-2 10,000.00
below the entries.
30 Balance / 10,000.00
B. For real or permanent accounts (asset, liability and owner’s equity accounts) – 20,000.00 20,000.00

1. On the first available line on the amount column having the smaller total,
write the balance of the account. Write the word Balance in the Items
Account: Se wing Supplie s Acct. No. 13
column, a check mark ( / ) in the Post. Ref. column to differentiate it from
Date Post Post
the posted entries, and write the last day of the period in the Date column.
2019 Items Ref. Debit Date 2019 Items Ref. Credit
2. Draw a single line across the amount columns immediately below the last
figure in the longer of the two columns and on the same line of the shorter June 1 J-1 5,000.00 June 30 Adjusting J-4 4,500.00
column. 7 J-2 3,000.00 30 Balance / 3,500.00
3. Write the total of each column below the single line. 8,000.00 8,000.00
4. Draw a double line below the totals and across all columns except the
Items columns.
5. Balances at the end of one accounting period are carried forward to the new
set of books of the next accounting period as beginning balance of that Account: Pre paid Re nt Acct. No. 14
period. Date Post Post
Date 2019
2019 Items Ref. Debit Items Ref. Credit
June 2 J-2 6,000.00 June 30 Adjusting J-3 3,000.00
Illustration is shown below (using the General Ledger of the D’ Fashionista). 30 Balance / 3,000.00
6,000.00 6,000.00

GENERAL LEDGER
Account: Cash Acct. No. 11
Post Post Account: Se wing Machine Acct. No. 16
Date
Date 2019 Date Post Post
2019 Items Ref. Debit Items Ref. Credit Date 2019
2019 Items Ref. Debit Items Ref. Credit
June 1 J-1 30,000.00 June 1 J-1 5,000.00
June 1 J-1 120,000.00 June 30 Balance / 120,000.00
4 J-2 18,000.00 2 J-2 6,000.00
10 J-2 10,000.00 11 J-2 5,400.00
14 J-2 10,000.00 18 J-2 5,000.00
30 J-3 5,000.00 22 J-2 2,000.00 Account: Accum. De pre ciation -Se wing Machine Acct. No. 16-A
25 J-3 6,000.00 Date Post Post
Date 2019
2019 Items Ref. Debit Items Ref. Credit
30 J-3 2,000.00
30 Balance / 41,600.00 June 30 Balance / 1,000.00 June 30 Adjusting J-4 1,000.00
73,000.00 73,000.00

Handout #: 6 Completion of the Accounting Cycle Accounting for Service, Merchandising and
Manufacturing Businesses
Accounting –
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Account: Accounts Payable Acct. No. 21 Account: Income Summary Acct. No. 33
Date Post Post Date Post Post
Date 2019 Date 2019
2019 Items Ref. Debit Items Ref. Credit 2019 Items Ref. Debit Items Ref. Credit
June 22 J-2 2,000.00 June 7 J-2 3,000.00 June 30 Closing J-5 23,700.00 June 30 Closing J-5 48,000.00
30 Balance / 1,000.00 30 Closing J-5 24,300.00
3,000.00 3,000.00 48,000.00 48,000.00

Account: Se rvice Fe e Acct. No. 41

Account: Wage s Payable Acct. No. 22 Date Post Post
Date 2019
Date Post Post 2019 Items Ref. Debit Items Ref. Credit
Date 2019
2019 Items Ref. Debit Items Ref. Credit June 30 Closing J-5 48,000.00 June 4 J-2 18,000.00
June 30 Balance / 1,200.00 June 30 Adjusting J-4 1,200.00 10 J-2 20,000.00
10 J-2 10,000.00
48,000.00 48,000.00
Account: Une arne d Re ve nue Acct. No. 23
Date Post Post
Date 2019
2019 Items Ref. Debit Items Ref. Credit Account: Wage s Expe nse Acct. No. 51
June 30 Balance / 5,000.00 June 30 J-3 5,000.00 Date Post Post
Date 2019
2019 Items Ref. Debit Items Ref. Credit
June 11 J-2 5,400.00 June 30 Closing J-5 13,200.00
25 J-2 6,000.00
Account: Louie , Capital Acct. No. 31
Date Post Post 30 J-4 1,800.00
Date 2019 13,200.00 13,200.00
2019 Items Ref. Debit Items Ref. Credit
June 30 Closing J-5 5,000.00 June 1 J-1 150,000.00
30 Balance / 169,300.00 30 Closing J-5 24,300.00
174,300.00 174,300.00 Account: Se wing Supplie s Expe nse Acct. No. 52
Date Post Post
Date 2019
2019 Items Ref. Debit Items Ref. Credit
June 30 Adjusting J-4 4,500.00 June 30 Closing J-5 4,500.00
Account: Louie , Drawing Acct. No. 32
Date Post Post
Date 2019
2019 Items Ref. Debit Items Ref. Credit
June 18 J-2 5,000.00 June 30 Closing J-5 5,000.00 Account: Re nt Expe nse Acct. No. 53
Date Post Post
Date 2019
2019 Items Ref. Debit Items Ref. Credit
June 30 Adjusting J-4 3,000.00 June 30 Closing J-5 3,000.00

Handout #: 6 Completion of the Accounting Cycle Accounting for Service, Merchandising and
Manufacturing Businesses
Accounting –
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Account: De pre ciation Expe nse - Se wing Machine Acct. No. 54 Reversing entries are journal entries made at the beginning of the new accounting
Date Post Post period to reverse the adjusting entries made at the end of the preceding period. This
Date 2019 process is for transactions involving certain types of adjustments. Not all adjusting entries
2019 Items Ref. Debit Items Ref. Credit
June 30 Adjusting J-4 1,000.00 June 30 Closing J-5 1,000.00
are reversed.
Basically, adjusting entries for accrued revenues and accrued expenses are reversed.
However, only adjusting entries for deferred revenues (unearned revenues) when income
method is used, and prepaid expenses when the expense method is used, are reversed.
Account: Utilitie s Expe nse Acct. No. 55
If the liability method is used to record deferred revenues and the asset method is
Date Post Post
Date 2019 used to record prepaid expenses, no reversing entries are required.
2019 Items Ref. Debit Items Ref. Credit
June 30 J-3 2,000.00 June 30 Closing J-5 2,000.00 For the illustrative problem, the D’ Fashionista, no reversing entry is required for
Prepaid Rent and Sewing Supplies since the asset method is used. Reversing entry is not
also required for Depreciation Expense.
The Post-Closing Trial Balance
For accrued expenses, specifically Wages Payable, the reversing entry is –
The last step in the accounting cycle for a service concern is the preparation of the
post-closing trial balance. The balances are taken from the ledger accounts after posting 2019
the adjusting and closing entries. The purpose of this is to make sure that the ledger July Wages Payable 1,800
accounts are in balance at the beginning of the next period. Illustration of the post-closing 1
trial balance is shown below: Wages Expense 1,800

D' Fashionista
After posting this to the respective ledger accounts, the Wages Payable account is
Post-Closing Trial Balance
closed while Wages Expense account will show a credit entry of P1,800 as shown below:
June 30, 2019

Debit Credit Account: Wage s Payable Acct. No. 22

Date Post Post
Date 2019
Cash 41,600 2019 Items Ref. Debit Items Ref. Credit
Accounts Receivable 10,000 July 1 Reversing J-6 1,800.00 June 30 Adjusting J-4 1,800.00
Sewing Supplies 3,500
Prepaid Rent 3,000
Sewing Machine 120,000
Account: Wage s Expe nse Acct. No. 51
Accumulated Depreciation - Sewing Machine 1,000
Date Post Post
Accounts Payable 1,000 Date 2019
2019 Items Ref. Debit Items Ref. Credit
Wages Payable 1,800 July 1 Reversing J-6 1,800.00
Unearned Revenue 5,000
Louie, Capital 169,300
178,100 178,100 The credit entry of P1,800 in the Wages Expense account is only temporary. On July
9, the regular payday, the entry to record payment of wages is as follows:

2019
Reversing Entries July Wages Expense 6,000
9

Handout #: 6 Completion of the Accounting Cycle Accounting for Service, Merchandising and
Manufacturing Businesses
Accounting –
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Cash 6,000 3. Advertising expense for 2018, P2,000.

4. Insurance expense for 2018, P4,400.
5. Depreciation rates: 10% for office equipment; 12% for furniture and fixtures.
Posting this entry to the Wages Expense account will show the actual wages expense 6. Accrued interest on notes payable, P160.
7. Accrued wages, P2,600.
incurred for the period July 1-9, 2019 of P4,200 (P200 x 7 x 3).
Required: Prepare –
Account: Wage s Expe nse Acct. No. 51
Date Post Post a. a ten-column worksheet for the year ended December 31, 2018.
Date 2019 b. an income statement.
2019 Items Ref. Debit Items Ref. Credit
c. a statement of changes in owner’s equity.
July 9 J-7 6,000.00 July 1 Reversing J-6 1,800.00 d. a statement of financial position.
e. adjusting and closing entries.
f. post-closing trial balance.
Problem 6 – 1
Problem 6 – 2
The trial balance of Clear Waters Company on December 31, 2018 is given below:
The trial balance for HOT SHOTS Studio is presented as follows:
CLEAR WATERS COMPANY
HOT SHOTS STUDIO
Trial Balance
Trial Balance
December 31, 2018
December 31, 2018
Debit Credit
Debit Credit
Cash 110,800
Accounts Receivable 118,400 Cash 51,400
Office Supplies Unused 8,000 Accounts Receivable 28,000
Prepaid Rent 24,480 Prepaid Insurance 24,000
Prepaid Advertising 5,760 Photo Supplies Unused 90,000
Prepaid Insurance 8,800 Photo Equipment 180,000
Office Equipment 35,200 Accum Depreciation - Photo Equipment 36,000
Accumulated Depreciation - Office Equipment 25,520 Notes Payable 10,000
Furniture and Fixtures 60,000 Accounts Payable 28,000
Accumulated Depreciation - Furniture & Fixtures 18,160 Unearned Service Revenue 12,000
Accounts Payable 50,400
Angelie, Capital 180,000
Notes Payable 8,000
Angelie, Drawing 10,000
Sunshine, Capital 200,000
Service Revenue 302,800
Sunshine, Drawing 85,040
Salaries Expense 146,400
Service Revenue 400,000
Rent Expense 36,000
Salaries and Wages Expense 197,600
Utilities Expense 40,000
Miscellaneous Expense 3,000
Miscellaneous Expense 8,000 568,800 568,800
702,080 702,080

Ad Data for adjustment:

ditional information:
a. Photo supplies on hand on December 31, P10,000.
1. Office supplies on hand at December 31, 2018, is P1,000. b. The insurance premium paid was for one (1) year to start August 1, 2018.
2. Rent expense for 2018, P16,320.
Handout #: 6 Completion of the Accounting Cycle Accounting for Service, Merchandising and
Manufacturing Businesses
Accounting –
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c. Estimated life of fixed assets, with no salvage value, is 10 years.

d. Unearned service revenue was for the three-months coverage of the Philippine Mini Olympics
to start December 1, 2018.
e. Interest accrued but not paid on notes payable on December 31, is P250.

Required: Prepared –

a. a ten-column worksheet for the year ended December 31, 2018.

b. an income statement.
c. a statement of changes in owner’s equity.
d. a statement of financial position.
e. adjusting and closing entries.
f. post-closing trial balance.

Handout #: 6 Completion of the Accounting Cycle Accounting for Service, Merchandising and
Manufacturing Businesses
Accounting –
1b