AE112 Module 4

AE 112-
MODULE 4
INSERT RELATED PICTURE HERE (COMPLETING THE
ACCOUNTING
CYCLE-
MERCHANDISING
BUSINESS)
COURSE LEARNING OUTCOMES
At the end of the module, you should
be able to:
1. prepare in good form a worksheet;
2. develop skills in the preparation of
financial statements for a
merchandising business;
3. journalize and post the adjusting
entries;
4. journalize and post the closing
entries;
5. prepare a post-closing trial
FINANCIAL balance; and
6. recognize the need for reversing
ACCOUNTING AND entries.
REPORTING
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The roots of education are bitter, but the fruit is sweet.
Aristotle
COURSE INTRODUCTION
This course provides an introduction to accounting, within the context of business
and business decisions. Students explore the role of accounting information in the
decision-making process and learn how to use various types of accounting information
found in financial statements and annual reports. This course starts with a discussion of
accounting thought and the theoretical background of accounting and the accounting
profession. The next topic is the accounting cycle - recording, handling, and summarizing
accounting data, including the preparation and presentation of financial statements for
merchandising and service companies. Moreover, it continues with transactions, financial
statements, and problems peculiar to the operations of partnerships and corporations as
distinguished from sole proprietorships. Topics include accounting for partnership formation
and operations; share capital issuances, treasury shares, other related transactions
affecting accumulated profits. Emphasis is placed on understanding the reasons
underlying basic accounting concepts and providing students with an adequate
background on the recording, classification, and summarization functions of accounting to
enable them to appreciate the varied uses of accounting data.
One of the main purposes of accounting is to accumulate the information
necessary for the preparation of the financial statements. Although many merchandising
enterprises prepare interim statements on a monthly or quarterly basis, a complete cycle of
business operations usually occurs every twelve months. At yearly intervals throughout the
life of a business enterprise, the operating data for the fiscal year must be summarized and
reported for the use of managers, owners, creditors, etc. Various assets of the enterprise on
the last day of the fiscal year, together with the status of the equities of creditors and
owners, must also be reported. The ledger, which contains the basic data for the reports,
must then be brought up to date through proper adjusting entries. Finally, the accounts
must be prepared to receive entries for transactions that will occur in the following year.
The sequence of year-end procedures are as follows:
 Gather adjustment data.

 Prepare and complete the worksheet.
 Prepare financial statements from the worksheet.
 Journalize the adjusting entries and post to the ledger.
 Journalize the closing entries and post to the ledger.
 Prepare the post-closing trial balance
 Journalize the reversing entries.
DATA FOR ADJUSTMENT
Similar to a service business, under the accrual basis of accounting, there is a need
to adjust the ledger balances of a merchandising business for the following reasons:
 To take up unpaid or accrued expenses

 To take up uncollected or accrued income
 To separate the expired expense from the unexpired expense (asset), when
expenses are paid in advance
 To separate the earned income from the unearned income (liability) , when
income is collected in advance
 To record the estimated uncollectible accounts or bad debts expense
 To record as depreciation the portion of the cost of fixed assets that has
benefited the current period through its use
 To record the cost of unsold merchandise inventory at the end of the
accounting period and eventually determine the cost of goods sold.
The adjusting entries as well as the concepts underlying each have been extensively
discussed in the last module.
THE WORKSHEET
Worksheet, in its broad sense, includes any columnar and systematic presentation of
accounting data. It ls usually prepared for the purpose of easily computing for certain
needed information or values. Sometimes called working paper or spreadsheet, it is a
useful tool in organizing and computing for a wide range of information that is needed by
the decision-makers within the business organization.
Although the worksheet is not a part of the financial reports, it facilitates the
preparation of various kinds of financial reports. It also gives the data-users a preview of
needed figures without the necessity of preparing formal reports and/or schedules. It shows
the pro-forma financial statement figures based on plans of actions and proposals. It is also
helpful in preparing interim financial statements whenever the actual journalizing and
posting of transactions are not considered feasible. As such, a worksheet can be a tool in
analyzing the effects of plans and proposals.
The worksheet is a place where the adjusting entries can be prepared informally
before they are entered in the books of accounts. Preparing a worksheet is a convenient
and a fast way to determine certain adjusted account balances. It provides a place
where accounts and amounts can be organized according to the financial statements in
which they will appear.
The preparation of a worksheet ls one of the optional steps ln the accounting cycle.
It ls not needed if there are few account titles in the trial balance and/or there are only few
items that require adjustments. If the accountant decides not to prepare a worksheet, the
adjustments should be journalized and posted before the financial statements can be
prepared. If there ls no worksheet, the financial statements can be prepared directly from
the general ledger after the adjusting entries are posted.
It is acceptable to prepare the worksheet and the adjusting entries simultaneously.

A completed worksheet gives a preview of the account balances after the proposed
adjustments are taken up. This may be prepared manually on a columnar sheet, or with a
computer, using spreadsheet software such as Excel. Since worksheet preparation is
optional, it may serve its purpose while still on the computer screen and it need not be
printed out in hard copy.
Steps in Preparing the Worksheet
In this module, an eight (8)- column worksheet will be prepared with the following column
headings:
a. Account Titles d. Income Statement
b. Trial Balance e. Balance Sheet
c. Adjustments
All column headings except for the Account Title should occupy two money
columns, one for debit and another for credit. The words 'Debit" and "Credit" must also be
written as part of the said column headings. ·
Step 1. Unadjusted Trial Balance
The unadjusted trial balance is entered in the first two columns of the worksheet. The
accounts with debit balances are entered on the debit column and the accounts with
credit balances are entered on the credit column. It is important that the debits and
credits equal before proceeding to the next step.
Step 2. Review of accounts and insertion of adjusting entries on the worksheet
Each of the adjusting entries is entered in the adjustments column, as it would be in

the journal. The amount to be debited is entered in the left column, and the amount to be
credited in the right column. If the account already exists, the adjustment is placed on the
same line as the unadjusted balance. If the account does not exist, a new line below the
trial balance totals is used to list the new account and enter the adjustment. The
adjustments are coded with a letter or number to facilitate the tracing of errors and the
copying of the adjusting entries from the worksheet Into the General Journal
Step 3. Extend the adjusted balances into the proper Income Statement and Balance Sheet
columns.
Combine the figures in the trial balance and the adjustments columns. This is
analogous to finding the new balance in each account. If the total of the debits exceeds
the total of the credits, the account is said to have an adjusted debit balance. Assets,
expenses, losses and the drawing account normally have adjusted debit balances. On the
other hand, if the total of the credits exceeds the total of the debits, the account is said to
have an adjusted credit balance. Liabilities, contra-asset accounts, capital account,
revenues and gains normally have adjusted credit balances.
Remember the following:
 The adjusted balances of the assets and drawing account are extended to the
debit side of the Balance Sheet columns. The adjusted balances of the liabilities,
capital, contra-asset accounts (allowance for bad debts and accumulated
depredation) are extended to the credit side of the Balance Sheet columns.
 The adjusted balances of the expenses, losses, and contra-revenue accounts
(Sales Discount, and Sales Returns and Allowances) are extended to the debit
side of the Income Statement columns. The adjusted balances of the revenues,
gains, and contra-expense accounts (Purchase Discounts, and Purchase
Returns and Allowances) are extended to the credit side of the Income
Statement columns.
An exception to the usual practice of extending only the account balances should
be noted. Both the debit and credit amounts for Income Summary are extended to the
Income Statement columns. Since both the amount of the debit adjustment (beginning
inventory) and the amount of the credit adjustment (ending inventory) will be reported on
the income statement, there is no need to determine the difference between the two
amounts.
Step 4. Net Income or Net Loss
After all of the items have been extended into the statement sections of the
worksheet, the four columns are totaled and the net income or net loss is determined.
The difference, or the balancing figure, is the profit or loss during the reporting
period. If the sub-total of the credit side of the Income Statement column (which contains
the revenues, gains, and contra-expense accounts) is greater than the sub-total of the
debit side (which contains the expenses, losses, and contra-revenue accounts), then the
operations during the period resulted in a profit. If the sub-total of the debit side exceeds
the sub-total of the credit side, the operation resulted in a loss.
If there is a profit, the balancing figure is entered simultaneously in the debit side of
the Income Statement column and in the credit side of the Balance Sheet column.
Indicate on the left side of the worksheet, under the Account Title column, on the same line
where the balancing figure is entered the description Net Income.
Account Titles Income Statement Balance Sheet

Debit Credit Debit Credit
Totals P 409,550 P 567,240 P 521,630 P 363,940
Net Income 157,690 157,690

Totals P 567,240 P 567,240 P 521,630 P 567,240
If there is a loss, the balancing figure is entered simultaneously in the credit side of
the Income Statement column and in the debit side of the Balance Sheet column. Indicate
on the left side of the worksheet, under the Account Title column, on the same line where
the balancing figure is entered the description Net Loss.
Account Titles Income Statement Balance Sheet

Debit Credit Debit Credit
Totals P 609,550 P 567,240 P 321, 630 P 363,940
Net Income 42, 310 42, 310
Totals P 609,550 P 609,550 P 363, 940 P 363, 940
A profit is extended to the credit side of the balance sheet column to indicate an
increase in the capital of the proprietor, while a loss is extended to the debit side of the
balance sheet column to indicate a decrease in the capital.
Step 5. Foot the debit and credit sides of the Income Statement and Balance Sheet
columns
Add the debit and credit columns of the Income Statement columns. Note that the
totals of the debit and credit sides become equal after the balancing figure is written on
the smaller side. After extending the amount of profit from the Income statement to the
credit side of the balance sheet, or the loss to the debit side of the balance sheet, the
totals of the two sides of the column will become equal. Once they are equal, the
worksheet is considered balanced.
JC Trading Company
Trial Balance
December 31, 2010
Debit Credit
Cash P 83,210.00
Accounts Receivable 163,000.00
Allowance for bad debts P 4,200.00
Notes receivable 40,000.00
Merchandise inventory 82,000.00
Office furniture and fixtures 116,000.00
Accumulated depreciation 53,700.00
Accounts payable 61,300.00
Notes payable (due in 2 years) 20,000.00
Jerald Crys, Capital 196,670.00
Jerald Crys, Drawing 18,000.00
Sales 467,000.00
Sales returns and allowances 3,000.00
Purchases 240,500.00
Purchase returns and allowances 1,750.00
Freight-in 12,700.00
Office salaries 21,600.00
Sales salaries 15,000.00
Insurance expense 5,000.00
Delivery expense 870.00
Office supplies expense 2,750.00
Miscellaneous selling expense 1,380.00
Interest income 850.00
Interest expense 460.00
Totals P 805,470.00 P 805,470.00
ILLUSTRATIVE PROBLEM:
The following unadjusted trial balance and adjustment data were gathered from
the ledger accounts and other records of JC Trading Company as of December 31, 2010,
end of its accounting period.
Additional information:
a. Unexpired insurance, P3,500

b. Bad debts is estimated at 4% of Accounts receivable
c. Depreciation rate for office furniture and fixtures is 20%
d. Interest on notes receivable already earned, but not yet collected, P420
e. Interest collected in advance, P280
f. Accrued salaries: Office salaries - P1,100 ; Sales salaries - P1,170
g. Merchandise inventory, December 31 - P97,500
The worksheet for JC Trading Company is shown on page 10.
PREPARATION OF FINANCIAL STATEMENTS
After completing the worksheet, preparation of the financial statements will be easy
because account balances were adjusted to their correct balances and had been
property classified into income statement accounts and balance sheet accounts.
A complete set of basic financial statements includes the following:
 Income Statement
 Statement of Changes in Owner's Equity
 Balance Sheet
 Statement of Cash Flows
INCOME STATEMENT
The functional presentation will be used in presenting the Income Statement of a

merchandising concern. The functional presentation classifies expenses according to
function as part of cost of goods sold, selling activities, administrative activities, other
operating activities, and finance cost. The components of the income statement include
the revenue and expenses.
 Revenue. Revenues are inflows of future economic benefits that increase equity,
other than contributions by owners. In a merchandising concern the main source of
revenue is the sales of merchandise to customers. The other operating revenues are
the revenues and gains from peripheral or incidental transactions of the enterprise.
These are not directly related to the principal or primary operations but nevertheless
part of the operating activities of the enterprise. Examples are interest revenue, gain
on sale of a fixed asset, dividend revenue, etc.
 Expense. Expenses are consumption or outflows of future economic benefits that
decrease equity, other than distributions or dividends paid to owners. Specifically,
expenses include the following: (a} Cost of Goods Sold, (b} Operating Expenses -
Selling Expenses and General and Administrative Expenses, (c} Other Operating
Expenses, and (d} Finance Cost
a. Cost of Goods Sold of a merchandising concern is the result of adding
the beginning inventory and net purchases to get the goods available
for sale and reducing this by the ending inventory.
b. Operating expenses of a merchandising business are incurred in

carrying out the operations of the business that can be sub-classified
into Selling/ Marketing Expenses and General and Administrative
Expenses.
 Selling/ Marketing Expenses are expenses incurred that are

directly related to selling functions. Examples are advertising
expense, travel expenses of sales people, salaries, commissions
and allowances of salespeople, expenses incurred for the
delivery equipment and any other expenses of the same nature.
 General and Administrative Expenses are expenses incurred

which are not related to selling functions. They are expenses
which are also known as expenses incurred in connection to the
administration or management of the business. Examples are
office rental, janitorial expenses, postage, property taxes,
insurance expense, and salaries of employees other than the
sales people, office supplies, and the like.
c. Other Operating expenses are those expenses with are not directly
related to the primary or principal operations but nevertheless are part
of the operating activities of the enterprise.
d. Finance Cost includes interest expense recognized based on the

passage of time. This is a current period cost of borrowing funds.
JC Trading Company
Income Statement
For the year ended December 31, 2010
Sales P 467,000
Less: Sales Returns Allowances 3 ,000
Net Sales P 464, 000
Less: Cost of goods sold
Merchandise Inventory beg P 82, 000
Add: Purchases P 240, 500
Less: Purchase returns and allowances 1, 750
Net Purchases P 238, 750
Freight-in 12, 700 251, 450
Total Goods Available for sale P 333, 450
Less: Merchandise Inventory, end 97, 500 235, 950
Gross Profit P 228, 050
Interest Income 990
Total Income P229, 040
Less: Operating Expenses:
Selling Expenses
Sales Salaries P 16, 170
Delivery expense 870
Miscellaneous selling expenses 1, 380 P 18, 420
General Expenses
Depreciation expense P 23, 200
Office Salaries 22, 700
Office supplies expense 2, 750
Bad debts expense 2, 320
Insurance expense 1, 500 52, 470 70, 890
Net Income from operations P 158, 150
Less: Interest expense 460
Net Income P 157, 690
Under the perpetual inventory method, the balance of the Cost of Goods Sold
account is deducted from Net Sales to get Gross Profit. Since the account titles Purchases,
Purchase returns and allowances, and Purchase discounts are not used in recording, there
is no information on these items; thus, they are not presented in the income statement. The
gross profit section of the income statement under the perpetual inventory method is
presented as follows:
Sales P 467,000
Less: Sales Returns and allowances ret 3,000
Net Sales P 464,000
Less: Cost of goods sold 235,950
Gross Profit P 228,050
Notice that the income statement is divided into four major sections: (1) revenue, (2)
cost of goods sold, (3) operating expenses, and (4) non-operating items. Due to these
numerous sections and the development of significant subtotals through a series of steps,
this format can also be called multi- step.
The presented income statement looks lengthy and it may even be longer if there
are numerous expense items to be included. In order to have a one-page report, only line
Items "'major categories or sections are presented at the face of the statement. Details or
the breakdown of each line item are presented as notes to financial statements.
JC Trading Company
Income Statement
Note
Net Sales 1 P 464, 000
Less: Cost of goods sold 2 235, 950
Gross Profit P 228, 050
Interest Income 990
Total Income P 229 ,040
Less: Operating Expenses:
Selling Expenses 3 P 18, 420
General Expenses 4 52, 470 70, 890
Net income from operations P 158,150
Less: Interest expense 460
Net Income P 157, 690
Note 1: Net Sales

Sales P 467,000
Less: Sales Returns and allowances 3,000
Net Sales P464,000
Note 2: Cost of Goods Sold
Merchandise inventory, beg P 82,000
Add: Purchases P 240,500
Less: Purchase returns and allowances 1,750
Net Purchases P 238,750
Freight-in 12,700 251.450
Total Goods Available for sale P 333,450
Less: Merchandise inventory, end 97,500
Cost of Goods Sold P 235,950
Note 3: Selling Expenses
Sales Salaries P 16,170
Delivery expense 870
Miscellaneous selling expenses 1,380
Total P 18, 420
Note 4: General Expenses
Depreciation expense P 23,200
Office Salaries 22,700
Office supplies expense 2,750
Bad debts expense 2,320
Insurance expense 1,500
Total P 52,470
STATEMENT OF CHANGES IN OWNER'S EQUITY
This statement shows the changes in the owner's equity by adding to the beginning
capital balance the additional investments made and the net income. From the total,
deduct the owner's drawing, if any, and the net loss, the result will be the ending capital
balance.
JC Trading Company
Statement of Changes in Owner's Equity
Jerald Crys, Capital- beg P 196,670

Add: Net Income 157,690
Total P 354,360
Less: Withdrawal 18,000
Jerald Crys, Capital - end P 336,360
BALANCE SHEET
The balance sheet format of a merchandising business is no different from any other
balance sheet. The only difference between a balance sheet for a merchandising
concern and that of a service type iIs the presence of the Merchandise Inventory account.
JC Trading Company
Income Statement
ASSETS Note
Current Assets:
Cash P 83,210
Trade and other receivables 5 196,900
Merchandise inventory 97,500
Prepaid insurance 3,500
Total current assets P 381,110
Non-Current Assets:
Fixed Assets 6 39,100
Total Assets P 420,210
LIABILITIES & OWNER'S EQUITY

Current liabilities:
Trade and other payables 7 P 63,570
Unearned interest income 280
Total current liabilities P 63, 850
Non-current Liability:
Notes payable 20, 000
Total Liabilities P 83, 850
Owner's Equity:
Jerad Crys, Capital 336, 360
Total Liabilities and Owner's Equity P 420, 210
Note 5: Trade and other receivables

Accounts Receivable P 163,000
Less: Allowance for bad debts 6, 520 P 156, 480
Notes receivable 40, 000
Accrued Interest receivable 420
Total P 196, 900
Note 6: Fixed assets
Office furniture and fixtures P 116,000
Less: Accumulated Depreciation 76,900
Book value P 39.100
Note 7: Trade and other payables
Accounts payable P 61,300
Accrued salaries payable 2, 270
Total P 63, 570
STATEMENT OF CASH FLOWS
The basic purpose of a statement of cash flows is to provide information about the
cash receipts and cash payments of a business entity during the accounting period. The
term cash flows includes both cash receipts and cash payments. In addition, the statement
is intended to provide information about the operating, investing, and financing activities
of the company during the period. A statement of cash flows assists investors, creditors and
others in assessing such factors as:
 The company's ability to generate positive cash flows in future periods.

 The company's ability to meet its obligations and to pay dividends
 The company's need for external financing
 Reasons for differences between the amount of net income and related net cash
flows from operating activities
 Both the cash and non-cash aspects of the company's investment and financing
transactions for the period
 Causes of the change In the amount of cash between the beginning and the end
of the account period.
Stated simply, a statement of cash flows helps users of financial statements

evaluate a company's ability to have sufficient cash - both on a short-run and on a long-
run basis. For this reason, the statement of cash flows is useful to virtually everyone
interested.in the company's financial health: short- and long-term creditors, investors,
management - and both current and prospective competitors.
To illustrate, the following post-closing trial balance was prepared last year, representing
the beginning balances of the accounts for the current year
JC Trading Company
Trial Balance
December 31, 2009
Debit Credit
Cash P 50,000.00
Allowance for bad debts P 4, 200. 00
Office furniture and fixtures 96,000.00
Totals P 393 ,000.00 P 393 ,000.00
The cash flow statement of JC Trading Company is shown as follows:
JC Trading Company
Statement of Cash Flow
For the year ended December 31,2010
Cash from Operating Activities:

Net Income P 157,690
Depreciation Expense 23,200
Accounts Receivable, Increase (55,680)
Notes Receivable, Decrease 20,000
Accrued interest receivable, Increase ( 420)
Merchandise inventory, Increase (15,500)
Prepaid Insurance, Increase (3,500)
Accounts payable, Decrease (57,130)
Accrued salaries payable, Increase 2,270
Unearned interest income, Increase 280
Net cash from operating activities P 71,210
Cash from lnvesting Activities:
Purchase of office furniture and fixture (20,000)
Cash from Financing Activities:
Withdrawal (18,000)
Increase (Decrease) in Cash P 33,210
Add: Cash, beg 50,000
Cash, end P 83,210
Computation of lncrease (Decrease) in current assets and current liabilities :
2010 2009 Inc (Dec)
Accounts receivable, net P 156,480 P 100,800 55,680
Notes Receivable 40,000 60,000 (20,000)
Accrued interest receivable 420 - 420
Merchandise inventory 97,500 82,000 15,500
Prepaid Insurance 3,500 - 3,500
Accounts payable 61,300 118,430 (57,130)
Accrued salaries payable 2,270 - 2,270
Unearned interest income 280 - 280
JOURNALIZING AND POSTING OF THE ADJUSTING ENTRIES
Journalizing of the adjusting entries could have been done at the same time as it
was made during the review of accounts and gathering of data for adjustments but it
would be more convenient to do it together with the closing entries. At this point, the
entries will now be easy to prepare because they are already in the worksheet.
After the entries are posted, the balances of all assets, liabilities, revenue, and
expense accounts correspond exactly to the amounts reported in the financial statements.
Based on the worksheet for JC Trading Company, the adjusting entries are:
Date Particulars Debit Credit

Adjusting Entries - December 31, 2010
(a) Prepaid Insurance 3,500.00
Insurance expense 3,500.00
(b) Bad debts expense 2,320.00

Allowance for bad debts 2,320.00
(4% x P163,000 = P6,520 - 4,200 = 2,320)
(c) Depreciation expense 23, 200.00

Accumulated depredation 23, 200.00
(20% x P116,000 = P23,200)
(d) Accrued interest receivable 420.00

Interest income 420.00
(e) Interest Income 280.00

Unearned interest income 280.00
(f) Office salaries 1,100.00

Sales salaries 1,170.00
Accrued salaries payable
(g) Income Summary 82, 000.00

Merchandise inventory (beg) 82, 000.00
Merchandise inventory (end) 97, 500.00

Income summary 97, 500.00
JOURNALIZING AND POSTING OF THE CLOSING ENTRIES
Immediately after journalizing and posting adjusting entries, another set of entries is
prepared. The Statement of Changes in Owner's Equity explicitly shows the effect of net
income or loss and owner's withdrawals on capital. Such effect is reflected in the books of
accounts through the preparation of CLOSING ENTRIES.
Closing entries are journal entries prepared at the end of the accounting period to
transfer temporary account balances to the capital account. After posting these entries,
all nominal accounts would have ZERO balances; thus, they are said to be closed and are
ready to accumulate data in the next accounting period.
Only the balances of nominal or temporary accounts need to be closed. The

balances of real or permanent accounts are carried over to the next period, hence
they are not closed, except for the drawing account.
Journalizing the Closing Entries. Though each statement of comprehensive income

account can be closed individually to the capital account, it would be more efficient if
these revenue and expense accounts are first closed to another temporary account, the
INCOME SUMMARY account. Other account titles used are Income and Expense Summary
and Revenue and Expense Summary. After that, the Income Summary account is closed to
the Capital account.
Income Summary
Expenses Revenues
The Income Summary account is distinct from the other accounts because it has no
normal balance. If the business operations resulted in a net income, i.e. the revenues are
greater than the expenses; this account will have a credit balance. If there is a net loss, i.e.
expenses exceeded the revenues; it will have a debit balance.
The Drawing account, on the other hand, is closed directly to the capital account.
The account titles and adjusted balances to be debited and credited in the closing entries
may come directly from any of the following:
 General ledger - after all adjusting entries have already been posted
 Worksheet - to be taken from the statement of comprehensive income column.

Here the preparation of the closing entries is simplified since all the information
needed is already grouped under this column. Even the amount of the net income
or loss for the period is readily available on the face of the worksheet.
 Statement of comprehensive income
As a summary, we can say that there are basically four closing entries:
(1) An entry to close all statement of comprehensive income accounts with credit
balances (revenue) to the Income Summary account.
Revenues (itemized) xxx
Income Summary xxx
(2) An entry to close all statement of comprehensive income accounts with debit
balances (expenses) to the Income Summary account
Income Summary xxx
Expenses xxx
(3) An entry to close the Income Summary account to the Capital account;
Income Summary (net income) xxx
Capital xxx
OR
Capital xxx
Income Summary xxx
(4) An entry to close the Drawing account to the Capital account.
Capital xxx
Drawing xxx
The following shows the flow of balances, from the nominal discounts directly to the capital
account:
Based on the worksheet, the closing entries of JC Trading Company are as follows:

Closing Entries- December 31, 2010
(a) Sales 467,000
Interest income 990
Sales returns and allowances 3,000
Income summary 464,990
(b) Income Summary 322,800

Purchase returns and allowances 1,750
Purchases 240,500
Freight-in 12,700
Office salaries 22,700
Sales salaries 16,170
Insurance expense 1,500
Delivery Expense 870
Office supplies expense 2,750
Miscellaneous selling expense 1,380
Interest expense 460
Bad debts expense 2,320
Depreciation expense 23,200
(c) Income Summary 157,690

Jerald Crys, Capital 157,690
(d) Jerald Crys, Capital 18,000

Jerald Crys, Drawing 18,000
The effect of these four entries may be described as follows:
a. The first entry closes all revenue and related accounts to Income Summary.
Revenue accounts with credit balances are closed by debiting such accounts and
transferring to the credit side of Income Summary. Contra-revenue accounts, like
Sales returns and allowances, with a normal debit balance, are credited and a
debit to the Income Summary account is made.
b. The second entry closes all expense and related accounts to Income Summary.
Expense accounts with debit balances are closed by crediting such accounts and
transferring to the debit side of Income Summary. Contra-expense accounts, like
Purchase returns and allowances with a normal credit balance, are debited and a
credit to the Income Summary account is made.
c. The third entry closes Income Summary by transferring its balance, the net income
for the year, to the owner's capital account.
d. The fourth entry closes the drawing account by transferring its balance to the
owner's capital account.
The Income Summary account, as it will appear after the merchandise inventory
adjustments and the closing entries have been posted, is presented below. Each item in
the account is identified as an aid to understanding, such notations are not an essential
part of the posting procedure.
Income Summary Account No. 99
Date Particulars PR Debit Credit Balance

Dec 31 Merchandise inventory, beg (AJE) 82,000 (82,000)
31 Merchandise inventory, end (AJE) 97,500 15,500
31 Revenue (CJE) 464,990 449,490
31 Expenses (CJE) 322,800 157 690
POST-CLOSING TRIAL BALANCE
The last step of the accounting cycle for the current period is the preparation of the
post-closing trial balance which pertains to the resulting figures after posting the closing
entries to the ledger. This is done to check whether the equal ty of the debits and the
credits had been maintained all throughout the process. At this point, the remaining
balances will only be those of the real accounts or the balance sheet accounts. The post-
closing trial balance of JC Trading Company is shown on the next page.
REVERSING ENTRIES
After the books have been closed and the post-closing trial balance prepared
signaling the end of the accounting period, the accountant begins the new accounting
period by making reversing entries. A reversing entry is a general journal entry made at the
beginning of the new accounting period to reverse an adjusting entry that was recorded
at the end of the preceding period.
Illustrations have been made on the subject of reversing entries. By way of summarizing
therefore, the following adjusting entries prepared at the end of the preceding period are
reversed:
a. Adjustment for an accrued income

b. Adjustment for an accrued expense
c. Adjustment for a prepaid expense if the expense method of recording prepayments
is used
d. Adjustment for a pre-collected income if the income method of recording pre-
collections is used.
Using the illustrative problem, the following reversing entries should be made in the
general journal on January 1, 2011 (the beginning of the new accounting period)

Reversing Entries - January 1,2011
(a) Insurance Expense 3,500
Prepaid insurance 3,500
(b) Interest income 420

Accrued interest receivable 420
(c) Unearned interest income 280

Interest income 280
(d) Accrued salaries payable 2,270

Office salaries 1,100
Sales salaries 1, 170
JC Trading Company
Post-Closing Trial Balance
December 31, 2010
Debit Credit
Cash P 83,210.00
Allowance for bad debts 6,520.00
Accrued interest receivable 420.00
Prepaid insurance 3,500.00
Office furniture and fixtures 116, 000.00
Accrued salaries payable 2,270.00
Unearned interest income 280.00
Total P 503,630.00 P 503,630.00
Practice Exercise 4-1. COMPLETING THE ACCOUNTING CYCLE
The account balances in the ledger of Jupiter's Store on December 31 of the current year
are as follows:
Cash P 34,150 Sales 577,800

Accounts Receivable 62,750 Sales returns and allowances 3,300
Merchandise inventory 81,700 Purchases 379,650
Prepaid insurance 7,125 Purchase discount 4,930
Store supplies 895 Sales salaries expense 61,150
Office supplies 575 Advertising expense 16,400
Store equipment 52,500 Misc. selling expense 1,960
Accum. Dep'n - Store equipt 17,200 Office salaries expense 31,500
Office equipment 18,300 Rent expense – selling 16,000
Accum. Dep'n - Office 7,800 Rent expense – general 8,000
equipt
Accounts payable 41,650 Misc. general expense 1,440
Note Payable (due in 5 25,000 Gain on sale of equipment 800
years)
J. Perez, Capital 124,215 Interest expense 2,000
J. Perez, Drawing 20,000
The data for adjustments on December 31 are as follows:
a. Merchandise inventory on December 31 - P89,200

b. Insurance expired during the year : Allocable as selling expense - P2,550; Allocable
as general expense - P715
c. Inventory of supplies on December 31: Office supplies - P295; Store supplies - P235
d. Depreciation for the current year: Store equipment - P4,050; Office equipment -
P 1,240
e. Bad debts is estimated at P2,750
f. Salaries payable on December 31 - Sales salaries P1 ,525 ;Office salaries P1 ,200
REQUIRED:
a. Prepare an eight-column worksheet for the year ended December 31

b. Prepare an income statement, a statement of owner's equity and a balance sheet
c. Prepare the adjusting, closing entries, and reversing entries
d. Prepare a post-closing trial balance
Account Title Trial Balance Adjustments Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit
Account Title Trial Balance Adjustments Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit
Income Statement
Statement of Changes in Owner’s Equity
Balance Sheet
Adjusting, Closing, and Reverse in entries:
Post-closing trial balance
End of Module 4

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AE 112-

 Gather adjustment data.

DATA FOR ADJUSTMENT

 To take up unpaid or accrued expenses

It is acceptable to prepare the worksheet and the adjusting entries simultaneously.

Steps in Preparing the Worksheet

a. Account Titles d. Income Statement

b. Trial Balance e. Balance Sheet

Step 2. Review of accounts and insertion of adjusting entries on the worksheet

Each of the adjusting entries is entered in the adjustments column, as it would be in

Remember the following:

Account Titles Income Statement Balance Sheet

Net Income 157,690 157,690

Account Titles Income Statement Balance Sheet

a. Unexpired insurance, P3,500

The worksheet for JC Trading Company is shown on page 10.

PREPARATION OF FINANCIAL STATEMENTS

A complete set of basic financial statements includes the following:

The functional presentation will be used in presenting the Income Statement of a

b. Operating expenses of a merchandising business are incurred in

 Selling/ Marketing Expenses are expenses incurred that are

 General and Administrative Expenses are expenses incurred

d. Finance Cost includes interest expense recognized based on the

Less: Sales Returns and allowances ret 3,000

Net Sales P 464,000

Less: Cost of goods sold 235,950

Gross Profit P 228,050

Note 1: Net Sales

STATEMENT OF CHANGES IN OWNER'S EQUITY

Jerald Crys, Capital- beg P 196,670

LIABILITIES & OWNER'S EQUITY

Note 5: Trade and other receivables

STATEMENT OF CASH FLOWS

 The company's ability to generate positive cash flows in future periods.

Stated simply, a statement of cash flows helps users of financial statements

Cash from Operating Activities:

JOURNALIZING AND POSTING OF THE ADJUSTING ENTRIES

Date Particulars Debit Credit

(b) Bad debts expense 2,320.00

(c) Depreciation expense 23, 200.00

(d) Accrued interest receivable 420.00

(e) Interest Income 280.00

(f) Office salaries 1,100.00

(g) Income Summary 82, 000.00

Merchandise inventory (end) 97, 500.00

JOURNALIZING AND POSTING OF THE CLOSING ENTRIES

Only the balances of nominal or temporary accounts need to be closed. The

Journalizing the Closing Entries. Though each statement of comprehensive income

 Worksheet - to be taken from the statement of comprehensive income column.

 Statement of comprehensive income

Revenues (itemized) xxx

Income Summary xxx

Income Summary xxx

Income Summary (net income) xxx

Income Summary xxx

Date Particulars Debit Credit

(b) Income Summary 322,800

(c) Income Summary 157,690

(d) Jerald Crys, Capital 18,000

The effect of these four entries may be described as follows:

Income Summary Account No. 99

Date Particulars PR Debit Credit Balance

a. Adjustment for an accrued income