Polangui, Community, College

Alnay, Polangui, Albay

Topic: Completing the Accounting Cycle

Reporters:

Manrique, Mark Imel E.

Rabino, John Leynard

Llaneta, Raquel B.

Llagas, Jeralyn B.

Relao, Edwin

Rectin, Retchin C.

Lontayao, Analyn B.

Refareal, Christopher

Rabino, John Leynard

Submitted to:

Mrs, Mila Sanorjo

 Completing the Accounting Cycle

Topics to be discuss:

• Adjustments are Journalized and Posted

• Closing Entries are Journalized and Posted

• Preparation of a Post-Closing Trial Balance

• Reversing Entries

ADJUSTMENTS ARE JOURNALIZED AND POSTED

The adjustment process is a key element of accrual basis accounting. The worksheet helps in the
identification of the accounts that need adjustments. The adjusting entries are directly entered in the
worksheet. Most accountants prepare the financial statements immediately after completing the
worksheet. The adjustments are journalized and posted as the closing entries are made. This step in the
accounting cycle brings the ledger into agreement with the data reported in the financial statements.

Illustration: The adjustments pertinent to the Weddings “R” Us illustration follow:

Journal

Date Account Titles and Explanation P.R Debit Credit

2010

May 31 Rent Expense 530 4,000

Prepaid Rent 140 4,000

31 Insurance Expense 540 1,200

Prepaid Insurance 150 1,200

31 Supplies Expense 520 3,000

Supplies 130 3,000

31 Depreciation Expense-Service Vehicle 560 4,000

Accumulated Depreciation-Serv. Vehicle 165 4,000

31 Depreciation Expense-Office Equipment 570 1,000

Accumulated Depreciation-Off. Equipt. 175 1,000

31 Unearned Referral Revenues 260 4,000

Referral Revenues 420 4,000

31 Salaries Expense 510 1,800

Salaries Payable 230 1,800
2010
May 31 Interest Expense 590 3,500
Interest Payable 250 3,500

Accounts Receivable 120 5,300

Consulting Revenues 410 5,300

CLOSING ENTRIES ARE JOURNALIZED AND POSTED (Step 8)

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 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 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 weddings “R” Us case.

1. Close the income accounts

Income accounts have credited balances before the 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 weddings “R” Us
is as follows:

2010
May 31 Consulting 410 67,700
Revenues
Referral revenues 420 4,000
Income summary 330 71,700

The dual effect of the is to make the balances of the income accounts equal to zero, and to transfer the
balances in total credit side of the income summary account. Note that the data for closing the income
accounts can be found in the credit side of the income statement columns of the worksheet in exhibit 7-
4.

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. These data can be found in the debit side of the income statement columns of
the worksheet.

2010
May 31 Income Salary 330 36,700
Salaries Expense 510 15,600
Supplies Expense 520 3,000
Rent Expense 530 4,000
Insurance Expense 540 1,200
Utilities Expense 550 4,400
Depreciation 560 4,000
Expense-Serv.
Vehicle
Depreciation 570 1,000
Expense-Off.
Equip.
Interest Expense 590 3,500

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 account

After posting the closing entries involving the income and expense accounts, the balance of the income
summary account will be equal to the profit or loss for the period. A profit is 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. For the weddings “R” Us, the entry is as follows:

2010
May 31 Gevera, Capital 310 14,000
Gevera, 320 14,000
withdrawals

The effect of posting 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 (Step 9)

It is possible to commit an error in posting the adjustments and closing entries to a 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.

Notice that only the balance sheet accounts have balances because at this point, all the income
statement accounts have been closed.

Weddings "R" Us

Post-Closing Trial Balance

May 31, 2010

Cash P 22,200

Accounts Receivable 17,300

Supplies 15,000

Prepaid Rent 4,000

Prepaid Insurance 14,200

Service Vehicle 420,000

Accumulated Depreciation-Service Vehicle P 4,000

Office Equipment 60,000

Accumulated Depreciation-Office Equipment 1,000

Notes Payable 210,000

Accounts Payable 53,000

Salaries Payable 1,800

Utilities Payable 1,400

Interest Payable 3,500

Unearned Referral Revenues 6,000

 Gevara, Capital 271,000

P551,700 551,700

REVERSING ENTRIES (Step 10)

Preparing the post-closing trial balance may not be the last step in the accounting cycle. Some entries
elect 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 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.

It should be emphasized 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.

Using the summary of adjusting entries in Chapter 5, the veracity of the general rule stated in the
previous paragraph can be proven. For example, in the case of a prepaid expense initially recorded in an
expense account, the adjusting entry debited an asset prepaid expense. An asset increased; hence,
applying the general rule, this adjustment can be reversed.

After analyzing the rest of the adjusting entries, 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 Weddings "R" Us to accrue salaries expense:

2010
May 31 Salaries Expense 1,800
Salaries Payable 1,800

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

2010
June 10 Salaries Payable 1,800
Salaries Expense 5,400
Cash 7,200
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 P7,200 applies to the current accounting period and how much was
accrued at the beginning of the period.

This step may appear easy in this simple case, but think of the problems that may arise tne company has
many employees, especially if some of them are paid on different time schedules such as weekly or
monthly. A reversing entry is an accounting procedure 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 ledger account-salaries
expense:

1. Adjusting Entry

2010
May 31 Salaries Expense 1,800
Salaries Payable 1,800

2. Closing Entry

2010
May 31 Income Summary 15,600
Salaries Expense 15,600

3. Reversing Entry

2010
June 1 Salaries Payable 1,800
Salaries Expenses 1,800

4. Payment Entry

2010
June 10 Salaries Expense 7,200
Cash 7,200

These transactions had the following effects on salaries expense:

a) Adjusted salaries expense to accrue P1,800 in the proper accounting period.

b) Closed the P15,600 in total salaries expense for May to income summary.
c) Established a credit balance of P1,800 on June 1 in salaries expense equal to the expense
recognized through the adjusting entry on May 31. The liability account salaries payable was
reduced to zero balance.

d) d) Recorded the P 7,200 payment of two weeks' salaries in the usual manner. Reversing entry
has the effect of leaving a balance of P 5,400 (P7,200-P1,800) in the salaries expense account.
This P 5,400 balance represented the salaries expense for the nine workdays in June. Making the
payment entry was simplified by the reversing entry. Reversing entries apply to all accrued
expenses or revenues.