Module 11 Financial Accounting and Reporting

COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting

First Semester | AY 2020-2021
Module 11
A. Course Code – Title : C-AE13: Financial Accounting and Reporting

B. Module No – Title : M11 – The Final Steps in the Accounting Cycle
C. Time Frame : 1/2 week (Week 10 ) – 3 hrs
D. Materials : Course Syllabus
1. Overview
This learning material provides a comprehensive discussion and illustration of the
remaining steps in the accounting cycle after the preparation of the financial statements.
The topics included herein are: (a) journalization and posting of adjusting entries, (b)
journalization and posting of closing entries, (c) preparation of the post-closing trial
balance, and (d) journalization and posting of reversing entries.
You should read clearly and understand well the topics explained herein. It is also
expected that you answer the assigned problems and exercises. Please read Chapter 6 of
your textbook.
2. Desired Learning Outcomes

At the end of the learning session, I can:
a) Describe closing and reversing entries, and cite the purpose of each;
b) Record the adjusting, closing and reversing entries in the general journal, and post
these entries to the general ledger accounts.; and,
c) Prepare a post-closing trial balance.
3. Content/Discussion
Lesson 1 –Journalization and Posting of Adjusting Entries

After the financial statements have been prepared, the next step is the journalization and
posting of the adjusting entries. By this time, it is expected that you are already familiar
with journalization and the posting process. The illustration of this is given in the latter
portion of this module.
Lesson 2 – Journalization and Posting of Closing Entries

After the adjusting entries have been prepared, recorded and posted, the next step is to
record and post the closing entries. What are closing entries? Why is there a need for
closing entries?
Faculty: SISINIA T. QUIZON 1 | Page

Just like adjusting entries, closing entries are also prepared at the end of the accounting
period in order to bring certain account balances to zero. Which accounts should be closed
at the end of the accounting period? Recall our lesson on real or permanent accounts,
nominal or temporary accounts and mixed accounts. These were explained thoroughly in
one of our previous lessons. To refresh your memory, real accounts are called permanent
accounts because these accounts are carried or brought forward to the following
accounting period. These accounts (assets, liabilities and the capital account) do not
pertain or relate only to a particular period. Regardless of when these were acquired, if
they are still existing at the end of the period, they are reported in the balance sheet. So,
these accounts are not closed.
On the other hand, nominal accounts are called temporary accounts because they relate
or pertain to only one particular accounting period. Thus, these accounts have to be closed
at the end of each accounting period, so that at the start of the next accounting period,
they start with a clean slate or a zero balance. These are the income or revenue, expense,
summary, and the drawing accounts. For example, the income of 2020 pertains only to the
year 2020, and not to any other year. When the year 2021, the following accounting period,
starts, the entity will have to start rendering services or selling goods again in order to
earn income for 2021. Likewise, the business will incur expenses again only for 2021. So,
the income and expenses of 2020 are totally independent of those of 2021. Each year or
accounting period has its own income and expenses.
How do we close an account? By bringing the account to a zero balance. How do we bring
an account to a zero balance? By making both sides of the account equal. Again, recall our
previous lesson on the balance of an account. An account has a zero balance when its total
debits are equal to its total credits, isn’t it? When an account has a zero balance, it is now
a closed account.
Note: The nominal accounts (income, expenses, summary and drawing accounts) are
closed at their adjusted balances. This is the reason why adjusting entries are prepared
before the closing entries.
The following journal and ledger accounts illustrate the recording and posting of the
adjusting and closing entries for the worksheet problem, Our Car Wash.


General Journal Page 27

Date Account Titles and Explanation PR Debit Credit
2020 Closing entries
Dec-31 Cleaning Fees Income 401 9 7000 0
Income Summary 403 97 0 0 00
To close the income account
31 Income Summary 403 6 1265 0

Taxes and Licenses 501 1 5 0 0 0
Salaries Expense 502 13 0 0 0 0
Repairs and Maintenance 503 2 8 0 0 0
Rent Expense 505 12 0 0 0 0
Utilities Expense 506 6 6 0 0 0
Advertising Expense 507 1 2 0 0 0
Bad Debts Expense 513 3 1 5 0
Supplies Expense 514 6 0 0 0 0
Insurance Expense 515 3 2 0 0 0
Depreciation Expense-Furniture and Fixtures 516 4 5 0 0
Depreciation Expense-Office Equipment 517 1 6 0 0 0
Depreciation Expense-Car Wash Equipment 518 3 6 0 0 0
Interest Expense 519 9 0 0 0 0
To close the expense accounts
31 Income Summary 403 3 5735 0

Corona, Capital 401 35 7 3 50
To close the summary account and transfer
net income to capital
31 Corona, Capital 401 3600 0

Corona, Drawing 402 3 6 0 00
To close the owner's drawing account
Bad Debts Expense Acct. No. 513

Date Explanation PR Debit Credit Balance
Dec-31 adjusting GJ 26 3,150 3,150
31 closing GJ 27 3,150 0
Allowance for Bad Debts Acct. No. 102-A


Supplies Expense Acct No. 514

Dec-31 adjusting GJ 26 60,000 60,000
31 closing GJ 27 60,000 0
Unused Supplies Acct. No.110

Jan-03 GJ 1 70,000 70,000
Dec-31 adjusting GJ 26 60,000 10,000
Insurance Expense Acct. No. 515

Dec-31 adjusting GJ 26 32,000 32,000
31 closing GJ 27 32,000 0
Prepaid Insurance Acct. No. 111

Jan-02 GJ 1 48,000 48,000
Dec-31 adjusting GJ26 32,000 16,000
Depreciation Expense-Furniture & Fixtures Acct. No. 516

31 closing GJ 27 4,500 0
Accumulated Depreciation-Furniture & Fixtures Acct. No. 129-A


Depreciation Expense-Office Equipment Acct. No. 517

Dec-31 adjusting GJ 26 16,000 16,000
31 closing GJ 27 16,000 0
Accumulated Depreciation-Office Equipment Acct. No. 130-A

Dec-31 adjusting GJ 26 16,000 16,000
Accumulated Depreciation-Car Wash Equipment Acct. No. 138-A

Dec-31 adjusting GJ 26 36,000 36,000
Depreciation Expense-Car Wash Equipment Acct. No. 518

Dec-31 adjusting GJ 26 36,000 36,000
31 closing GJ 27 36,000 0

Interest Expense Acct. No. 519

Dec-31 adjusting GJ 26 90,000 90,000
31 closing GJ 27 90,000 0
Interest Payable Acct. No. 204

Dec-31 adjusting GJ 26 90,000 90,000
Cleaning Fees Income Acct. No. 401

Jan-28 GJ 2 85,000 85,000
Feb-27 GJ 4 78,000 163,000
Mar-30 GJ 6 81,000 244,000
Apr-30 GJ 8 80,500 324,500
May-31 GJ 10 69,000 393,500
Jun-29 GJ 12 98,000 491,500
Jul-30 GJ 14 82,500 574,000
Aug-29 GJ 16 75,000 649,000
Sep-30 GJ 18 72,000 721,000
Oct-30 GJ 20 65,000 786,000
Nov-29 GJ 22 98,000 884,000
Dec-29 GJ 25 96,000 980,000
31 adjusting GJ 26 10,000 970,000
31 closing GJ 27 970,000 0

Unearned Cleaning Fees Acct No. 206

Dec-31 adjusting GJ 26 10,000 10,000
Prepaid Rent Acct. No. 113

Dec-31 adjusting GJ 26 30,000 30,000
Rent Expense Acct. No. 505

Jan-02 GJ 1 150,000 150,000
Dec-31 adjusting GJ 26 30,000 120,000
31 closing GJ 27 120,000 0
Income Summary Acct. No. 403

Dec-31 closing GJ 27 970,000 970,000
31 closing GJ 27 612,650 357,350
31 closing GJ 27 357,350 0
Corona, Capital Acct. No. 401

Jan-01 GJ 1 653,000 653,000
Dec-31 closing GJ 27 357,350 1,010,350
31 closing GJ 27 36,000 974,350

Lesson 3 – The Post-closing Trial Balance

After the closing entries have been recorded and posted, the next step is the preparation
of the Post-closing Trial Balance. What do you find in this trial balance? Only the real
accounts, because after the nominal accounts have been closed, only the real accounts
have account balances. That is why it is said that the post-closing trial balance is actually
the balance sheet in trial balance form. Again, it is meant to prove the equality of the
remaining debits and credits.
Below is the post-closing trial balance of “Our Car Wash”.
Our Car Wash

Post-Closing Trial Balance
December 31, 2020
Account Titles Debit Credit
Cash P 850,000
Accounts Receivable 63,000
Allowance for Bad Debts P 3,150
Unused Supplies 10,000
Prepaid Insurance 16,000
Prepaid Rent 30,000
Furniture and Fixtures 65,000
Accumulated Depreciation-Furniture and Fixtures 4,500
Office Equipment 250,000
Accumulated Depreciation-Office Equipment 16,000
Car Wash Equipment 950,000
Accumulated Depreciation-Car Wash Equipment 36,000
Accounts Payable 100,000
Interest Payable 90,000
Loans Payable 1,000,000
Unearned Cleaning Fees 10,000
Corona, Capital 974,350
Total P2,234,000 P2,234,000
Note: The accounts presented in the Post-closing Trial Balance are the real accounts
(assets, liabilities and owner’s capital account).

Lesson 4 – The Reversing Entries

The final step in the accounting process is the formulation of the reversing entries. A
reversing entry is the exact opposite of an adjusting entry made in the immediately
preceding period. It is prepared at the start of the following accounting period. Not all
adjusting entries should be reversed. Only those adjusting entries that caused an
increase in an asset or a liability should be reversed. Therefore, the adjusting entries for
accrued income and accrued expenses need to be reversed. Likewise, the adjusting entry
for prepaid expense using the expense method as well as that of unearned income using
the income or revenue method should also be reversed.
The adjusting entry for accrued income records an asset, as well as the adjusting entry
for a prepaid expense, using the expense method. In both cases, we record an asset. To
record accrued income we debit an asset, Receivable. Using the expense method, the
adjusting entry is also a debit to Prepaid Expense, an asset, right?
To record an accrued expense, what is the appropriate credit? It is to a liability, Payable,
isn’t it? How about the adjusting entry for unearned income using the income or
revenue method? The credit is to Unearned Income, a liability, right?
But what is the principle behind the reversing entry for accruals? It is the matching
principle. For the deferrals, it is the principle of consistency or uniformity.
Let us go back to the worksheet and take a look at the adjusting entry to record the
accrued interest for 9 months on the loan. The adjusting entry was: debit Interest
Expense, P90,000; and credit Interest Payable, P90,000. This liability is to be paid in 2021,
that is, on the due date of the loan, March 31, 2021. When the loan will be paid,
including the interest of P120,000 for 12 months, the entry would be: debit Loans
Payable, P1,000,000; debit also Interest Expense, P120,000 (the entire interest for 12
months); and credit Cash, P1,120,000.
Observe: The interest for 9 months, P90,000, was incurred in 2020, recorded in 2020, and
was also included in the 2020 financial statements, right? But it will be recorded again on
March 31, 2021, the following year, when it will be paid. Therefore, to remove at the start
of 2021 the P90,000 incurred and recorded in 2020 from the 2021 expenses, a reversing
entry is made on Jan 1, 2021, as follows:
Debit: Interest Payable P90,000

Credit: Interest Expense P90,000
By means of this reversing entry, the P90,000, although it will be paid and recorded
again in 2021, has already been removed from the P120,000 interest expense of 2021,
because it is properly an expense of 2020. Thus, the net Interest Expense in 2021 will
only be P30,000, the actual interest incurred for the first 3 months of 2021, P30,000.
The same principle applies to the reversing entry for accrued income.

Let us go now to the adjusting entry for prepaid expense using the Expense Method.
The adjusting entry was: debit: Prepaid Rent, P30,000, and credit: Rent Expense, P30,000.
As an effect of this adjusting entry, the adjusted Rent Expense balance was P120,000, the
amount reported in the Income Statement. Because Rent Expense is a nominal account, it
was closed at the end of the period, isn’t it? So, Rent Expense now has a zero balance, so
that at the start of 2021, the account will start with a clean slate. However, Prepaid Rent,
being an asset, is not closed; instead, the account is carried forward to the next
accounting period. Therefore, when 2021 starts, Prepaid Rent, an asset, will be reflected
with the beginning balance of P30,000. But the method used by the entity is the Expense
Method, isn’t it? However, the account which is reflected and reported is an asset,
Prepaid Rent with a balance of P30,000. Take a close look. Is the account Prepaid Rent
consistent with the Expense Method? Of course, it’s not. The account to be reflected
must also be an expense account to be consistent with the method used, the Expense
Method. So, this can be done by making the reversing entry on Jan 1, 2021, as follows:
Debit: Rent Expense P30,000

Credit: Prepaid Rent P30,000
After this reversing entry is made and posted, the Prepaid Rent account will now have a
zero balance, and Rent Expense is the account that is now reflected, consistent with the
Expense Method.
The same principle applies in the need for a reversing entry for unearned income using
the Income or Revenue Method.
Note: Reversing entries are optional.
4. Progress Check
a) What are closing and reversing entries?
b) Why and when is there a need to make closing and reversing entries?
c) Describe the post-closing trial balance.
5. Assignment (Optional)
Answer end-of- Chapter 6 prob nos. 3, 4, 5 and 6.
6. Assessment
Answer end-of-Chapter 6 prob no. 7.

7. References
Manuel, Zenaida Vera-Cruz (2018) 21st Century Accounting Process, Basic Concepts and
Procedures, Manila, Philippines: Zenaida Vera-Cruz Manuel.
Ballada, Win. (2020) Basic Financial Accounting and Reporting, Cavite, Philippines:
Dom Dane Publishers & Made Easy Books.
Cabrera, Ma. Elenita B. & Cabrera, Gilbert Anthony B. (2018) Financial Accounting and
Reporting,Manila, Philippines: GIC Enterprises & Co., Inc.
Ferrer, Rodiel C. & Millan, Zeus Vernon B. (2017) Fundamentals of Accountancy,

Business and Management, Part 1, Baguio City, Philippines: Bandolin Enterprise.
Warren, Carl S., Reeve, James M., & Duchac, Jonathan E. ((2015) Accounting 25th
Edition, Pasig City, Philippines: Cengage Learning Asia Pte Ltd (Philippine Branch).
Gilbertson, Claudia B., Lehman, Mark W., & Gentene, Debra H. (2017) Century 21
Accounting Multi-column Journal 10th Edition, Boston, MA 02210 USA: Cengage
Learning.
Wild, John; Kwok, Winston; Venkatesh, Sundar; Shaw, Ken W. & Chiappetta,
Barbara. (2016) Fundamental Accounting Principles 2nd Edition, 2 Penn Plaza, New York:
McGraw-Hill Education.

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COLLEGE OF ACCOUNTANCY

C-AE13: Financial Accounting and Reporting

A. Course Code – Title : C-AE13: Financial Accounting and Reporting

2. Desired Learning Outcomes

Lesson 1 –Journalization and Posting of Adjusting Entries

Lesson 2 – Journalization and Posting of Closing Entries

Faculty: SISINIA T. QUIZON 1 | Page

Faculty: SISINIA T. QUIZON 2 | Page

Faculty: SISINIA T. QUIZON 3 | Page

General Journal Page 27

31 Income Summary 403 6 1265 0

31 Income Summary 403 3 5735 0

31 Corona, Capital 401 3600 0

Bad Debts Expense Acct. No. 513

Allowance for Bad Debts Acct. No. 102-A

Faculty: SISINIA T. QUIZON 4 | Page

Supplies Expense Acct No. 514

Unused Supplies Acct. No.110

Insurance Expense Acct. No. 515

Prepaid Insurance Acct. No. 111

Depreciation Expense-Furniture & Fixtures Acct. No. 516

Accumulated Depreciation-Furniture & Fixtures Acct. No. 129-A

Faculty: SISINIA T. QUIZON 5 | Page

Depreciation Expense-Office Equipment Acct. No. 517

Accumulated Depreciation-Office Equipment Acct. No. 130-A

Accumulated Depreciation-Car Wash Equipment Acct. No. 138-A

Depreciation Expense-Car Wash Equipment Acct. No. 518

Faculty: SISINIA T. QUIZON 6 | Page

Interest Expense Acct. No. 519

Interest Payable Acct. No. 204

Cleaning Fees Income Acct. No. 401

Faculty: SISINIA T. QUIZON 7 | Page

Unearned Cleaning Fees Acct No. 206

Prepaid Rent Acct. No. 113

Rent Expense Acct. No. 505

Income Summary Acct. No. 403

Corona, Capital Acct. No. 401

Faculty: SISINIA T. QUIZON 8 | Page

Lesson 3 – The Post-closing Trial Balance

Below is the post-closing trial balance of “Our Car Wash”.

Our Car Wash

Faculty: SISINIA T. QUIZON 9 | Page

Lesson 4 – The Reversing Entries

Debit: Interest Payable P90,000

Faculty: SISINIA T. QUIZON 10 | Page

Debit: Rent Expense P30,000

Faculty: SISINIA T. QUIZON 11 | Page

Ferrer, Rodiel C. & Millan, Zeus Vernon B. (2017) Fundamentals of Accountancy,

Faculty: SISINIA T. QUIZON 12 | Page

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