4

COMPLETE THE ACCOUNTING CYCLE

OF A SERVICE BUSINESS
for Fundamentals of Accountancy, Business and
Management 1
Grade 11 (ABM)
Quarter 2 / Week 2
 FOREWORD

This self-learning kit for Fundamentals of Accounting

Business and Management 1 is designed specifically for
ABM students in the Senior High School to develop and
enhance their knowledge about accounting particularly
the accounting cycle.
In this learning kit, the students will gain knowledge
about the guidelines to be followed in the accounting
cycle particularly in steps 7 (Preparation of Financial
Statements) and 8 (Preparation of Closing Entries). This
knowledge is very important for ABM students to develop
their bookkeeping skills which is an important requirement
to pass the NCIII bookkeeping TESDA assessment.
What happened?
This section contains pre-activities like review of the
prior knowledge and a pretest on what the learners have
learned in their previous discussions.
What I Need to Know? (Discussion)
This section contains the guidelines in continuing the
steps of the accounting cycle.
What I Have Learned? (Evaluation/Post Test)
The exercises contained in this section are guaranteed
to build comprehension, skills, and competence with
regards to the topic. These will also serve as a diagnostic
tool to identify the learners’ areas of strengths and
difficulties.
OBJECTIVES:
K: Identify the remaining steps in completing the
accounting cycle of a service business
S: Complete the accounting cycle by preparing financial
statements and closing entries
A: Ensure the procedures and guidelines in accounting
are subserviently followed so that all the accounts are
updated, so we could provide timely and accurate data
reporting which would be very important in the decision
making related to business.

LEARNING COMPETENCY:

Complete the Accounting Cycle of a Service Business

(ABM_FABM11-IVa-d -34)

I. WHAT HAPPENED

REVIEW
After the preparing the adjusting entries and with the adjusted trial
balance encoded in the partial worksheet the next step for us to complete
the accounting cycle is to follow the remaining steps:
Step 7 (Preparation of financial statements) and
Step 8 (Closing the books or Closing Entries).

Figure 1. Accounting Cycle of a Service Business.

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PRE-ACTIVITIES/PRE-TEST:
Let us check whether you already have knowledge about the topics
and activities that we will have in this module.

Think about this!

Direction: Read and analyze each item and choose the letter of the correct
answer. Write your answers on your notebook/activity sheets.
1. Revenues minus expenses equals __________.
A. Net income B. Net Loss
C. Gross Income D. Both A or B
2. What types of reports are created during the accounting cycle for the
use of management?
A. None B. General ledger
B. General journal C. Financial statements
3. The financial statement that reports the assets, liabilities, and
stockholders' (owner's) equity at a specific date is the ___________.
A. Balance Sheet B. Income Statement
C. Statement of Changes in Equity D. Trial Balance
4. These are accounts that are closed at the end of the accounting
period.
A. Temporary accounts B. Permanent accounts
C. Nominal Accounts D. Both A and C
5. After preparing for closing entries in the general journal, what is the next
step?
A. Prepare post-closing trial balance
B. Posting it to the general journal
C. Prepare reversal entry
D. Prepare balance sheet

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II. WHAT YOU NEED TO KNOW

STEP 7 PREPARATION OF FINANCIAL STATEMENTS

Before we proceed to the preparation of financial statements, a

worksheet is prepared to help determine whether the operation of the
business results in net income or net loss without preparing financial statement
like income statement. There can be situations wherein a business may need
to make urgent decisions based on its financial performance such that
waiting for the financial statements to be prepared may cause a costly delay
for business opportunity to pass. For this reason, a worksheet becomes
imperative (Tugas, Salendrez, Rabo 2016, 109).
Here are the easy steps in preparing a worksheet (Tugas, Salendrez,
Rabo 2016, 109):
1. Prepare a trial balance on the worksheet.
2. Enter the adjustments in the adjustment columns.
3. Enter adjusted balances in the adjusted trial balance columns.
4. Extend adjusted trial balance amounts to appropriate financial statements
columns.
a. Columns 7 and 8 for the income Statement (extend only the nominal
accounts)
b. Columns 9 and 10 for the statement of Financial position (extend only
the real accounts)
5. Total the statement columns, compute net income (or loss), and complete
the worksheet.

Using the example in the previous module (Quarter 2, Module 1), we

will proceed to step 4 and extend the nominal accounts for the income
statement and statement of financial position columns and total them. The
balancing figure would be the attributed to either net income or net less.

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Table 1. Sample worksheet of Gray Electronics Repair Services.
Profit and Loss Statement of Financial
ADJUSTED TRIAL
ACCOUNT TITLES TRIAL BALANCE ADJUSTMENTS Statement / Income Position / Balance
BALANCE
Statement Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 7,480.00 7,480.00 7,480.00
Accounts Receivable 3,400.00 300 3,700.00 3,700.00
Service Supplies 1,500.00 900 600 600.00
Furniture and Fixture 3,000.00 3,000.00 3,000.00
Service Equipment 16,000.00 16,000.00 16,000.00
Accounts Payable 9,000.00 9,000.00 9,000.00
Loans Payable 12,000.00 12,000.00 12,000.00
Mr. Gray, Capital 13,200.00 13,200.00 13,200.00
Mr. Gray, Drawing 7,000.00 7,000.00 7,000.00
Service Revenue 9,550.00 300 9,850.00 9,850.00
Rent Expense 1,500.00 1,500.00 1,500.00
Salaries Expense 3,500.00 3,500.00 3,500.00
Taxes and Licenses 370 370 370.00
Utilities Payable 1,800.00 1,800.00 1,800.00
Utilities Expense 1,800.00 1,800.00 1,800.00
Service Supplies
900 900 900.00
Expense
Accumulated Depreciation -
Service Equipment
4,000.00 4,000.00 4,000.00
Depreciation Expense 4,000.00 4,000.00 4,000.00
Allowance for Bad
100 100 100.00
Debts
Bad Debts Expense 100 100 100.00
TOTALS 43,750.00 43,750.00 7,100.00 7,100.00 49,950.00 49,950.00 12,170.00 9,850.00 37,780.00 40,100.00
Net Loss 2,320.00 2,320.00
TOTALS 12,170.00 12,170.00 40,100.00 40,100.00

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FINANCIAL STATEMENTS
In financial reporting, there are several financial statements which serve
different purposes. Some of which are: 1. Income statement or Profit and Loss
Statement, 2. Statement of Changes in Equity, 3. Balance Sheet or Statement of
Financial Position and 4. Statement of Cash Flows, and 5. Notes to Financial
Statements.

In this module, we will just focus on the first three financial statements
and we will use the adjusted trial balance in the previous module (Module 1
Quarter 2) to illustrate these statements.

INCOME STATEMENT / PROFIT AND LOSS STATEMENT

The Income Statement also called the Profit and Loss Statement is a
formal statement showing the financial performance of the business for a given
period of time. Financial performance is measured simply in terms of revenues
earned less expenses incurred. The income statement basically contains all the
nominal accounts, except the drawing accounts and the income summary
account.
There are two ways of presenting the income statement (Tugas,
Salendrez, Rabo 2016, 111). These are (1) the natural form (single step) which is
used to present the income statement of a service business and (2) the
functional form (multi-step) which is used to present the income statement of
a merchandising business. We will be using the single step in this module since
we are still in the service business.

Figure. 2. Simplified format of the Profit and Loss Statement or Income

statement using single step.
The period covered is
worded as “For the”
then followed by the
date the accounting
cycle ended. Name of the Company
Profit and Loss Statement
For the month ended December 31, 2019
Revenue ₱ XX
Less: Expenses XX
Other gains and losses XX
Net Income / Net Loss ₱ XX Don’t forget to
indicate the double
rule which means
overall total and the
currency symbol.

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Figure 3. Sample Income Statement.

GRAY ELECTRONICS REPAIR SERVICES

PROFIT AND LOSS STATEMENT
For the month of December 31, 2019
Service Revenue ₱ 9,850.00
Expenses should be
Less:
represented in the
Depreciation Expense 4,000.00
order of magnitude
Salaries Expense 3,500.00 (amounts) with
Utilities Expense 1,800.00 interest expense
Rent Expense 1,500.00 always at the
Service Supplies Expense 900.00 bottom, regardless
Taxes and Licenses 370.00 of its amount.
Bad Debts Expense 100.00
Net Loss ₱ -2,320.00

Note: As you can observe Gray Electronics Repair Services has a loss of Net
loss of ₱2,320.00.

STATEMENT OF CHANGES IN EQUITY

After preparing the income statement, the statement of changes in

equity is prepared to formally update the capital account. This is a formal
statement that shows the movements in the equity accounts in the given
period of time.

Figure 4. Sample Statement of Changes in Equity.

GRAY ELECTRONICS REPAIR SERVICES

STATEMENT OF CHANGES IN EQUITY
For the month of December 31, 2019

Mr. Gray, Capital Beginning balance ₱ 13,200.00

Less: Mr. Gray, Drawing 7,000.00
Net Loss 2,320.00
Mr. Gray, Capital Ending Balance ₱ 3,880.00

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BALANCE SHEET / STATEMENT OF FINANCIAL POSITION
The Balance sheet is a statement that shows the financial position or
condition of an entity by listing the assets, liabilities and owner’s equity at a
specific date (Ballada, Ballada Ed. 2006, 7-9).
Also known as the statement of financial position, the balance sheet
provides the amounts for the various assets, liabilities, and owner’s capital
accounts.
The assets are presented first, followed by the liabilities and equity. To
show that the accounting equation is satisfied, the total assets and the total
liabilities and owner’s capital should be highlighted to be of equal amount.

Figure 5. Sample Balance Sheet or Statement of Financial Position or Balance

Sheet.

GRAY ELECTRONICS REPAIR SERVICES

STATEMENT OF FINANCIAL POSITION
As of December 31, 2019
ASSETS
Cash ₱ 7,480.00
Accounts Receivable 3,700.00
Less: Allowance for Doubtful accounts (100.00)
Service Supplies 600.00
Furniture and Fixture 3,000.00
Service Equipment 16,000.00
Less: Accumulated Depreciation (4,000.00)
Total Assets ₱ 26,680.00

LIABILITIES
Accounts Payable ₱ 9,000.00
Loans Payable 12,000.00
Utilities Payable 1,800.00
OWNERS EQUITY
Mr. Gray, Capital 3,880.00
Total Liabilities and Capital ₱ 26,680.00

STEP 8 PREPARATION OF CLOSING ENTRIES

In the preparation for the next accounting period, closing entries are to
be made and this comprises three different activities: 1. Preparing closing
entries in the general journal; 2. Posting the closing entries in the general ledger
and; 3. Creating Post-closing Trial balance.

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DEFINITION OF CLOSING ENTRY AND ITS IMPORTANCE OR PURPOSE

A closing entry is a journal entry made at the end of an accounting

period to transfer the temporary account balances to the permanent
accounts. The importance or purpose of closing entries is to reduce the
balances of the temporary accounts to zero from the general ledger, and
prepare the permanent accounts for another accounting period.

By making closing entries, all nominal or temporary accounts are closed

out to the owner’s capital account, through the income summary account
(Florendo 2016, 229).

INCOME SUMMARY DEFINITION

Income summary is a summary account used to close the income and

expense accounts. And then, the net income amount shall be transferred to
the equity accounts of the owner.

To proceed with the closing entries the following journal entries should be
made:
1. Revenues xx
Income summary xx
To close revenue accounts
2. Income summary xx
Expenses xx
To close expense account
3. Income summary xx
Owner’s Capital xx
To close income summary account if there is a net income.
4. Owner’s Capital xx
Income Summary xx
To close income summary if there is a net loss.
5. Owner’s Capital xx
Owner’s Drawings xx
To close the drawings of account.

The first two entries effectively close out all incomes summary account.
After making the first two entries, the balance of the income summary account
is either a credit or a debit, and should be equal to the amount of net income
or less respectively. The third entry closes out the income summary account to
the owner’s capital if there is a net income. The fourth entry closes out the
income summary account to owner’s if there is a net loss. The fifth entry closes
the owner’s drawings to the owner’s capital. It should be noted that although
there is an outflow of resources in owner’s drawings, it is not included in the
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income statement since it is purely a transactions with the owner (Florendo
2016, 229).

Here is an actual example of the closing entries using Gray Electronics

Repair Services transactions.

Step 1 and 2 closing service revenue and expenses.

Date Description Debit Credit
Dec. 31, Service Revenue ₱ 9,850.00
2019 Income Summary 9,850.00
To close revenue accounts
Dec. 31, Income summary 12,170.00
2019 Depreciation Expense 4,000.00
Salaries Expense 3,500.00
Utilities Expense 1,800.00
Rent Expense 1,500.00
Service Supplies Expense 900.00
Taxes and Licenses 370.00
Bad Debts Expense 100.00
To close expense account

Note: Please note that Gray Electronics Repair Services have a net loss
therefore we will use step 4 to close it out the income summary if there is a
net loss.

Step 4 Closing Net Loss.

Dec. 31, Mr. Gray, Capital ₱ 2,320.00
2019 Income summary 2,320.00
To record net loss.

Step 5 Closing Owner’s drawing

Dec. 31, Mr. Gray, Capital ₱ 7,000.00
2019 Mr. Gray, Drawing 7,000.00
To close the drawings account.

POSTING THE CLOSING ENTRIES TO THE GENERAL LEDGER

After preparing closing entries in the general journal, we will now post it
to the general ledger to update the accounts.

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Account Title: Service Revenue

Date: Remarks Debit: Credit Balance

Dec. 31, Forwarded Credit
₱ 9,850.00
2019 balance
Dec. 31,
Closing entries 9,850.00 ₱ 0.00
2019

Account Title: Depreciation Expense

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit
₱ 4,000.00
2019 balance
Dec. 31,
Closing entries 4,000.00 ₱ 0.00
2019

Account Title: Salaries Expense

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit 3,500.00
₱
2019 balance
Dec. 31,
Closing entries 3,500.00 ₱ 0.00
2019

Account Title: Utilities Expense

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit 1,800.00
₱
2019 balance
Dec. 31,
Closing entries 1,800.00 ₱ 0.00
2019

Account Title: Rent Expense

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit 1,500.00
₱
2019 balance
Dec. 31,
Closing entries 1,500.00 ₱ 0.00
2019

Account Title: Service Supplies Expense

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit 900.00
₱
2019 balance
Dec. 31,
Closing entries 900.00 ₱ 0.00
2019

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Account Title: Taxes and Licenses expense
Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit 370.00
₱
2019 balance
Dec. 31,
Closing entries 370.00 ₱ 0.00
2019

Account Title: Bad Debts Expense

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit 100.00
₱
2019 balance
Dec. 31,
Closing entries 100.00 ₱ 0.00
2019

Account Title: Mr. Gray, Drawing

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit 7,000.00
₱
2019 balance
Dec. 31,
Closing entries 7,000.00 ₱ 0.00
2019

Account Title: Mr. Gray, Capital

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Credit 13,200.00
₱
2019 balance
Dec. 31, Closing drawing
7,000.00 6,200.00
2019 account
Dec. 31,
Closing Net loss 2,320.00 ₱ 3,880.00
2019

After posting the accounts, we will also prepare a ledger to the income
summary to check if we have missed an important account to be closed. If the
income summary account balance is not zero means that some accounts that
some temporary accounts are not yet closed.

Account Title: Income Summary

Date: Remarks Debit: Credit Balance
Closing Service ₱ 9,850.00 9,850.00
Dec. 31,
Revenue
2019
account
Dec. 31, Closing expenses
12,170.00 2,320.00
2019 account
Dec. 31,
Closing Net loss 2,320.00 ₱ 0.00
2019

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POST CLOSING TRIAL BALANCE

After closing the temporary accounts, only the permanent accounts are
left with balances in the ledger. From these balances, another trial balance is
prepared call the Post-Closing Trial Balance. These balances in the post-
closing trial balance will be brought forward as the beginning balances of the
same accounts in the next accounting period.
Here is an example of a Post-closing Trial Balance of Gray Electronics
Repair Services.

Figure 6. Post Closing Trial Balance

GRAY ELECTRONICS REPAIR SERVICES
POST-CLOSING TRIAL BALANCE
As of December 31, 2019
Debit Credit
Cash ₱ 7,480.00
Accounts Receivable 3,700.00
Allowance for Doubtful accounts ₱ 100.00
Service Supplies 600.00
Furniture and Fixture 3,000.00
Service Equipment 16,000.00
Accumulated Depreciation 4,000.00
Accounts Payable 9,000.00
Loans Payable 12,000.00
Utilities Payable 1,800.00
Mr. Gray, Capital 3,880.00
Totals ₱ 30,780.00 ₱ 30,780.00

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III. WHAT HAVE I LEARNED
EVALUATION/POSTTEST:
Complete the accounting cycle using the adjusted trial balance below.
JM PHOTOCOPYING CENTER
Adjusted Trial Balance
December 31, 2019
Account Title Debit Credit
Cash ₱ 16,500.00
Accounts Receivable 7,500.00
Allowance for doubtful accounts ₱ 150.00
Note Receivable 5,527.50
Unused Supplies 3,000.00
Prepaid rent 5,000.00
Photocopying Equipment 30,000.00
Accumulated Depreciation - Photocopying 450.00
Equipment
Furniture and Fixtures 5,000.00
Accumulated Depreciation - Furniture & Fixtures 75.00
Accounts payable 2,500.00
Loan payable 50,000.00
Notes payable 5,000.00
Salaries Payable 816.67
Unearned Photocopying Revenues 1,800.00
Mercado, Capital 10,000.00
Mercado, Drawing 500.00
Photocopying Revenues 24,227.50
Taxes and Licenses Expense 2,000.00
Salaries expense 4,800.00
Supplies expense 7,000.00
Utilities expense 2,500.00
Rent expense 5,000.00
Depreciation Expense 525.00
Bad debts expense 166.67
Totals ₱ 95,019.17 ₱ 95,019.17
Requirements:
1. Prepare Financial Statements: Profit and loss Statement, Statement of
changes in Equity and Statement of Financial Position
2. Closing entries: Prepare closing entries in the general journal; 2. Post the
closing entries in the general ledger and; 3. Creating Post-closing Trial
balance.

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 REFERENCES
Tugas, Florenz C., Salendrez, Herminigilda E., Rabo, Joy S. 2016. Fundamentals
of Accountancy, Business and Management 1. Quezon City: Vibal
Group, Inc
Florendo, Joselito G. 2016. Fundamentals of Accountancy, Business and
Management 1. Manila: Rex Bookstore, Inc.
Ballada, Win and Ballada, Susan, Ed. 2006. Basic Accounting. Manila:
DomDane Publishers & Made Easy Books.

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 DEPARTMENT OF EDUCATION
SCHOOLS DIVISION OF NEGROS ORIENTAL

SENEN PRISCILLO P. PAULIN, CESO V

Schools Division Superintendent

FAY C. LUAREZ, TM, Ed.D., Ph.D.

OIC - Assistant Schools Division Superintendent
Acting CID Chief

NILITA L. RAGAY, Ed.D.

OIC - Assistant Schools Division Superintendent

ROSELA R. ABIERA
Education Program Supervisor – (LRMS)

ARNOLD R. JUNGCO
Education Program Supervisor – (SCIENCE & MATH)

MARICEL S. RASID
Librarian II (LRMDS)

ELMAR L. CABRERA
PDO II (LRMDS)

SALVADOR G. AGUILAR JR
Writer

IVANNE RAY A. GIDOR

Lay-out Artist
_________________________________

ALPHA QA TEAM
GIL S. DAEL
MARIA SOLEDAD M. DAYUPAY
MARIA ACENITH D PASTOR
JEE LIZA T. INGUITO

BETA QA TEAM
RICKLEOBEN V. BAYKING
LITTIE BETH S. BERNADEZ
GIL S. DAEL
MARIA SOLEDAD M. DAYUPAY
MARIA ACENITH D PASTOR
JEE LIZA T. INGUITO
MERCYDITHA D. ENOLPE
RONALD G. TOLENTINO

DISCLAIMER

The information, activities and assessments used in this material are designed to provide accessible learning modality to the teachers
and learners of the Division of Negros Oriental. The contents of this module are carefully researched, chosen, and evaluated to comply with the
set learning competencies. The writers and evaluator were clearly instructed to give credits to information and illustrations used to substantiate this
material. All content is subject to copyright and may not be reproduced in any form without expressed written consent from the division.

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 SYNOPSIS AND ABOUT THE AUTHOR

This Self Learning Kit (SLK) is all about the guidelines to be followed
in the accounting cycle particularly steps 7 (Preparation of Financial
Statements) and 8 (Preparation of Closing Entries). This knowledge is very
important for ABM students to develop their bookkeeping skills which is
an important requirement to pass the NCIII bookkeeping TESDA
assessment.
In this learning kit the students will gain knowledge in applying the
accounting cycle with sufficient knowledge to complete the cycle
which enhances their bookkeeping skills whether to be applied in a
small sari-sari store or a larger company.

AUTHOR

Salvador G. Aguilar Jr graduated from Villaflores College

with a Bachelor of Science in Commerce Major in
Management Accounting and also taken Bachelor of
Science in Secondary Education degree major in Social
Science as his secondary course. His 8 years of experience
working in a private financial institution and his experience
in accounting where he passed NC III bookkeeping
assessment helped him teach ABM subjects competently
within his 2 years of teaching at Manjuyod National High
School – Senior High.

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