Tanauan Institute, Inc.

– Senior High School Department

TANAUAN INSTITUTE, INC.

Senior High School Department

Modified Learning Scheme : Workbook

Fundamentals of Accountancy, Business, and Management 2
1st Semester, S.Y. 2020-2021
Subject Teacher: ____________________

Name: ___________________________________ Score: ________________

Section: __________________________________ Date: _________________

Topic Session

Using the Worksheet and Chapter 4

Closing and Reversing Entries –
Finishing the Accounting Cycle

Objectives of the Lesson

At the end of the lesson, the student should be able to:
1. Prepare adjusted balance.
2. Do worksheet preparation.
3. Close the books and make reversing entries.

Values Integration
Perseverance. The attitude that no matter an issue or a problem maybe
one will still continue until he or she succeeds. The lesson that will be
discussed involves analytical thinking which will require the perseverance
of the students in order to learn it.

Discussion
The Worksheet
Accountants often use a worksheet to help transfer data from the adjusted trial balance
to the financial statements. This multi-column document provides an efficient way to
summarize the data for financial statements. It simplifies the adjusting and closing
process. It can also reveal errors. The worksheet is not part of the ledger or the journal,
nor is it a financial statement. It is a summary device used by the accountant for his
convenience.

Subject: Topic: Session: Page | 1

 Tanauan Institute, Inc. – Senior High School Department

The accountant generally prepares a worksheet when it is time to adjust the accounts
and prepare financial statements. However, it is possible to prepare financial statements
directly from the adjusted trial balance at the end of the accounting period if the
business has relatively few accounts.
Preparing the Worksheet
In order to clearly illustrate the specifics in worksheet preparation, a sample worksheet
is provided and attached with this lesson.
1. Enter the account balances in the Unadjusted Trial Balance columns and total
the amounts.
Note:
 The account titles are written in the worksheet in the same order as they are
written in the trial balance. (We’re just transferring the unadjusted trial balance or
trial balance for short, into the first three columns of the worksheet.)
 Debit balances in the trial balance will be written under the debit column of
Unadjusted Trial Balance column in the worksheet while the credit balances in
the trial balance will be written under the credit column of Unadjusted Trial
Balance in the worksheet.
 Accounts with zero balances will not be included in the worksheet. (However, the
book advises the opposite which is also correct)
 Total debits must equal total credits.

2. Enter the Adjusting Entries in the adjustments columns and total the amounts.
Note:
 The amounts of the adjusting accounts are entered in the same row where the
same account title is written, however the amount is written under the
adjustments column instead.
 The side where the amounts of the accounts will be put depends on where the
account falls on the adjusting entries.
 Total the debit and credit side of the adjustment column. Both sides must be
equal.

3. Compute each account’s adjusted balance by combining the unadjusted trial

balance and the adjustment figures. Enter the adjusted amounts in the Adjusted
Trial Balance columns.
Note:
 The adjusted Trial Balance is prepared by combining horizontally, line by line, the
amount of each account in the unadjusted trial balance columns with the
corresponding amounts in the adjustment columns. This procedure is called
cross-footing.

Subject: Topic: Session: Page | 2

 Tanauan Institute, Inc. – Senior High School Department

 A simple convention to observe when extending amounts from the trial balance
to the adjusted trial balance follows:
o Add when the type of adjustment (debit or credit) is the same as the
unadjusted balance.
o Subtract when the type of adjustment (debit or credit) is different from the
unadjusted trial balance.
 This process is followed through all the accounts. The adjusted trial balance
columns are then totalled to check the accuracy of the cross footing.

4. Extend the income and expense amounts to the income statement columns.
Total the statement columns. Extend the asset, liability and owner’s equity
amounts from the adjusted trial balance columns to the balance sheet columns.
Note:
 Every account is either a balance sheet account (asset, liability, or owner’s
equity) or an income account (income or expense) statement account.
 Income and expense accounts are moved to the income statement columns.
 Asset, liability, capital and withdrawal accounts are extended to the balance
sheet columns.
 Debits in the adjusted trial balance remain as debits in the statements columns
while credit remains on the credit side.

5. Compute profit or loss as the difference total revenues and total expenses in the
income statement. Enter profit or loss as a balancing amount in the income
statement and in the balance sheet, and compute the final column totals.
Note:
 The profit or loss should always be the amount by which the debit and credit
columns for income statement and credit columns for balance sheet differ.
 After completion, total debits and total credits in the income statement and
balance sheet columns must be equal.
 The profit figure is extended to the credit column of the balance sheet because
profit increases owner’s equity and increases in owner’s equity are recorded as
credits.

Closing Entries
Income, expense and withdrawal accounts are temporary accounts that accumulate
information related to a specific accounting period. These temporary accounts facilitate
income statement preparation. At the end of each year, the balances of these temporary
accounts are transferred to the capital account. Thus, the balance of the owner’s capital
account represents the cumulative net result of income, expense, and withdrawal
transactions. This phase of the cycle is called the closing procedure.
A temporary account is said to be closed when an entry is made such that its balance
becomes zero. Closing simply transfers the balance of one account to another account.

Subject: Topic: Session: Page | 3

 Tanauan Institute, Inc. – Senior High School Department

In this case, the balances of the temporary accounts are transferred to the capital
account. A summary account – Income Summary is used to close the income and
expense accounts. The steps in closing the accounts of an entity will be illustrated using
the Auto Sun Repair Shop.
1. Close the income accounts.
Income accounts have credit balances before closing entries are posted. For this
reason, an entry debiting each revenue account in the amount of its balance is needed
to close the account. The credit is made to the income summary account.
The entry to close the income accounts for the Auto Sun Repair Shop is as follows:
Dr. Cr.
Dec. 31 Service Income 42,250
Income Summary 42,250
The dual effect of the entry is to make the balances of the income accounts equal to
zero, and to transfer the balances in total to the credit side of the income summary
account.
2. Close the expense accounts.
Expense accounts have debit balances before the closing entries are posted. For this
reason, a compound entry is needed crediting each expense account for its balance
and debiting the income summary for the total.
Dr. Cr.
Dec. 31 Income Summary 25,250
Salaries Expense 5,600
Supplies Expense 500
Rent Expense 7,000
Insurance Expense 2,000
Gas Expense 1,500
Advertising Expense 1,750
Depreciation Expense – Vehicles 4,500
Depreciation Expense-Equipment 1,000
Interest Expense 1,400

The effect of posting the closing entry is to reduce the expense account balances to
zero and to transfer the total of the account balances to the debit side of the income
summary account.
3. Close the income summary.
After posting the closing entries involving the income and expense account, the balance
of the income summary account will be equal to the profit or loss for the period.
A profit indicated by a credit balance and a loss by a debit balance. The income
summary account, regardless of the nature of its balance, must be closed to the capital
account.

Subject: Topic: Session: Page | 4

 Tanauan Institute, Inc. – Senior High School Department

For the Auto Sun Repair Shop, the entry is as follows:

Dr. Cr.
Dec. 31 Income Summary 17,000
Capital 17,000
The effect of posting this closing entry is to close the income summary account balance
and to transfer the balance to the Capital account of the business for the profit.
4. Close the withdrawal account.
The withdrawal account shows the amount by which capital is reduced during the period
by withdrawals of cash or other assets of the business by the owner for personal use.
For this reason, the debit balance of the withdrawal account must be closed to the
capital account as follows.
Dr. Cr.
Dec. 31 Capital 5,000
Withdrawals 5,000
The effect of this closing entry is to close the withdrawal account and to transfer the
balance to the capital account.
Preparation of a Post-Closing Trial Balance
It is possible to commit an error in posting the adjustments and closing entries to the
ledger accounts; thus, it is necessary to test the equality of the accounts by preparing a
new trial balance. This final trial balance is called a post-closing trial balance.
 The post-closing trial balance verifies that all the debits equal the credits in the
trial balance.
 The trial balance contains only balance sheet items such as assets, liabilities,
and ending capital because all income and expense accounts, as well as the
withdrawal account, have zero balances.
Auto Sun Repair Shop
Post-Closing Trial Balance
Dec. 31, 2016

Cash P182,250
Accounts Receivable 10,000
Supplies 500
Prepaid Rent 14,000
Prepaid Insurance 22,000
Vehicles 300,000
Accumulated Depreciation-Vehicles P 4,500
Equipment 54,000
Accumulated Depreciation-Equipment 1,000
Notes Payable 100,000

Subject: Topic: Session: Page | 5

 Tanauan Institute, Inc. – Senior High School Department

Accounts Payable 1,000

Salaries Payable 1,600
Interest Payable 1,400
Unearned Revenues 11,250
Del Mundo, Capital 462,000
P582,750 P582,750

Notice that only the balance sheet accounts have balances because at this point, all the
income statement accounts have been closed.
Reversing Entries
Some entities choose to reverse certain end-of-period adjustments on the first day of
the new period. A reversing entry is a journal entry which is the exact opposite of a
related adjusting entry made at the end of the period. It is basically a bookkeeping
technique made to simplify the recording of regular transactions in the next accounting
period.
Note that reversing entries are optional. Also, the act of reversing a previously recorded
adjusting entry should not lead us to the conclusion that the entries reversed are
unnecessary or inaccurate.
Even when an entity follows the policy of making reversing entries, not all adjusting
entries should be reversed. Generally, a reversing entry should be made for any
adjusting entry that increased an asset or a liability account. Therefore, all accruals are
reversed but only deferrals initially recorded in income statement – income or expense –
accounts are reversed.
The adjustments that can be reversed are as follows: prepaid expenses (expense
method), unearned revenues (income method), accrued expenses and accrued
revenues.
Illustration: To show how reversing entries can be helpful, consider the adjusting entry
made in the records of Auto Sun Repair Shop to accrue salaries expense
Dr. Cr.
Dec. 31 Salaries Expense 1,600
Salaries Payable 1,600

When the employees are paid on the next regular payday, the entry would be:

Dr. Cr.
Jan. 10 Salaries Payable 1,600
Salaries Expense 2,400
Cash 4,000

Subject: Topic: Session: Page | 6

 Tanauan Institute, Inc. – Senior High School Department

Note that when the payment is made, without a prior reversing entry, the accountant
must look into the records to find out how much of the P4,000 applies to the current
accounting period and how much was accrued at the beginning of the period.
A reversing entry is an accounting procedure that helps to solve this difficult problem.
As noted above, a reversing entry is exactly what its name implies. It is a reversal of the
adjusting entry made. For example, observe the following sequence of transactions and
their effects on the account – salaries expense.
1. Adjusting Entry
Dec. 31 Salaries Expense 1,600
Salaries Payable 1,600

2. Closing Entry

Dec. 31 Income Summary 5,600

Salaries Expense 5,600

3. Reversing Entry

Dec. 31 Salaries Payable 1,600

Salaries Expense 1,600

4. Payment Entry

Jan. 10 Salaries Expense 4,000

Cash 4,000
These transactions had the following effects on salaries expense:
a. Adjusted salaries expense to accrue P1,600 in the proper accounting period.
b. Closed the P5,600 in total salaries expense for November to income summary.
c. Established a credit balance of P1,600 on Jan. 1 in salaries expense equal to the
expense recognized through the adjusting entry on Dec. 31. The liability account
salaries payable was reduced to a zero balance.
d. Recorded the P4,000 payment of half-month’s salaries with ten workdays in the
usual manner. The reversing entry has the effect of leaving a balance of P2,400
(P4,000 – P1,600) in the salaries expense account. This P2,400 balance
represented the salaries expense for the six workdays in January.
Making the payment entry was simplified by the reversing entry. Reversing entries apply
to all accrued expenses or revenues.

Questions

Subject: Topic: Session: Page | 7

 Tanauan Institute, Inc. – Senior High School Department

1. In what ways is the worksheet useful to accountants?

___________________________________________________________
___________________________________________________________
___________________________________________________________
2. After accomplishing the worksheet, the debit and credit columns of the trial
balance, adjustments, adjusted trial balance, income statement and
balance sheet are all in balance. Does it mean that the worksheet is free
from error? Prove your answer.
__________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
3. Why are closing entries made at end of the accounting period?
__________________________________________________________
___________________________________________________________
___________________________________________________________
4. Why income and expense accounts also called temporary accounts are
closed at the end of each accounting period?
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
5. What is a reversing entry? Enumerate the four adjustments that can be
reversed at the beginning of the next accounting period.
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________

Activity

Worksheet Preparation: Get a piece of columnar pad and complete the

worksheet using the following data.
The May 31, 2016 trial balance of Rose Best Surveying Inc. is presented as follows:

Rose Best Surveying Inc.

Trial Balance
May 31, 2016

Cash P 210,000
Accounts Receivable 930,000

Subject: Topic: Session: Page | 8

 Tanauan Institute, Inc. – Senior High School Department

Prepaid Advertising 360,000

Engineering Supplies 270,000
Survey Equipment 1,890,000
Accum. Depreciation – Survey Equip. P 640,000
Accounts Payable 190,000
Unearned Income 120,000
Notes Payable 500,000
Rose, Capital 1,120,000
Rose, Withdrawals 700,000
Service Income 6,510,000
Salaries Expense 3,270,000
Rent Expense 960,000
Insurance Expense 250,000
Utilities Expense 160,000
Miscellaneous Expense 80,000
Totals P 9,080,000 P 9,080,000

The following information pertaining to the year-end adjustments is available:

a. The P360,000 prepaid advertising represents expenditure made on Nov. 1, 2015
for monthly advertising over the next 18 months.
b. A count of the engineering supplies at May 31, 2016 amounted to P90,000.
c. Depreciation on the surveying equipment amounted to P160,000.
d. One-third of the unearned survey revenues has been earned at year-end.
e. At year-end, salaries in the amount of P140,000 have accrued.
f. Interest of P60,000 on the notes payable has accrued at year-end.

Quiz
Complete the accounting cycle for the “Rose Best Surveying Inc.” (the
data can be seen from the activity part after you finish the given activity)
by making closing entries, preparing a post-closing trial balance, and
making reversing entries for the accrued salary and interest expense.

Subject: Topic: Session: Page | 9

 Tanauan Institute, Inc. – Senior High School Department

Reflection
As an accounting student what did realize in the lesson?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
________________________________

References
Book:
Ballada, Win. 2017. Fundamentals of Accountancy Business & Management
1. Manila, Philippines. DomDane Publishers. pp. 197-200.

Subject: Topic: Session: Page | 10