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.

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 I 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
ACCOUNT TITLES TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL
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 3,400.00 300.00 3,700.00 3,700.00
Allowance for Bad Debts 100.00 100.00 100.00
Service Supplies 1,500.00 900.00 600 600.00
Furniture and Fixture 3,000.00 3,000.00 3,000.00
Service Equipment 16,000.00 16,000.00 16,000.00
Accumulated Depreciation - 4,000.00 4,000.00 4,000.00
Service Equipment

Accounts Payable 9,000.00 9,000.00 9,000.00

Utilities Payable 1,800.00 1,800.00 1,800.00
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 9,550.00 300.00 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 370.00 370.00 370.00
Utilities Expense 1,800.00 1,800.00 1,800.00
Service Supplies
900.00 900.00 900.00
Expense
Depreciation Expense 4,000.00 4,000.00 4,000.00
Bad Debts Expense 100 100.00 100.00
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, 2020
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, 2020
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, 2020

Mr. Gray, Capital Beginning balance ₱ 13,200.00

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

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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, 2020
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
Utilities Payable 1,800.00
Loans Payable 12,000.00
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
2020 Income Summary 9,850.00
To close revenue accounts
Dec. 31, Income summary 12,170.00
2020 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
2020 Income summary 2,320.00
To record net loss.

Step 5 Closing Owner’s drawing

Dec. 31, Mr. Gray, Capital ₱ 7,000.00
2020 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
₱ 9,850.00
2020 Credit
Dec. 31, balance
Closing entries 9,850.00 ₱ 0.00
2020

Account Title: Depreciation Expense

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit
₱ 4,000.00
2020 balance
Dec. 31,
Closing entries 4,000.00 ₱ 0.00
2020

Account Title: Salaries Expense

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit 3,500.00
₱
2020 balance
Dec. 31,
Closing entries 3,500.00 ₱ 0.00
2020

Account Title: Utilities Expense

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit 1,800.00
₱
2020 balance
Dec. 31,
Closing entries 1,800.00 ₱ 0.00
2020

Account Title: Rent Expense

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit 1,500.00
₱
2020 balance
Dec. 31,
Closing entries 1,500.00 ₱ 0.00
2020

Account Title: Service Supplies Expense

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit 900.00
₱
2020 balance
Dec. 31,
Closing entries 900.00 ₱ 0.00
2020

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Account Title: Taxes and Licenses expense
Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit 370.00
₱
2020 balance
Dec. 31,
Closing entries 370.00 ₱ 0.00
2020

Account Title: Bad Debts Expense

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit 100.00
₱
2020 balance
Dec. 31,
Closing entries 100.00 ₱ 0.00
2020

Account Title: Mr. Gray, Drawing

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded Debit 7,000.00
₱
2020 balance
Dec. 31,
Closing entries 7,000.00 ₱ 0.00
2020

Account Title: Mr. Gray, Capital

Date: Remarks Debit: Credit Balance
Dec. 31, Forwarded 13,200.00
₱
2020 Credit
Dec. 31, balance
Closing drawing
7,000.00 6,200.00
2020 account
Dec. 31,
Closing Net loss 2,320.00 ₱ 3,880.00
2020

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
2020
account
Dec. 31, Closing expenses
12,170.00 2,320.00
2019 account
Dec. 31,
Closing Net loss 2,320.00 ₱ 0.00
2020

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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, 2020
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 1,800.00
Utilities Payable 9,000.00
Loans Payable 12,000.00
Mr. Gray, Capital 3,880.00
Totals ₱ 30,780.00 ₱ 30,780.00

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