Review Class for ACT111-0 and ACT112-0 E.

T Yuchengco School of Business and Management

Module 5
ADJUSTING THE ACCOUNTS

Closing Entries
Closing entries formally recognize in the ledger the transfer of net income (or loss) and owner's
drawings to owner's capital as shown in the owner's equity statement.

Journalizing and posting closing entries is a required step in the accounting cycle.

The drawing, revenue, and expense accounts are temporary (nominal) accounts. Asset accounts,
liability accounts, and the owner's capital account are permanent (real) accounts.

A temporary account, Income Summary, is used in closing revenue and expense accounts to minimize
the amount of detail in the permanent owner's capital account.

In closing the books of a proprietorship:

1. Debit each revenue account for its balance, and credit Income Summary for total revenues.
2. Debit Income Summary for total expenses, and credit each expense account for its balance.
3. Debit Income Summary, and credit Owner's Capital for the amount of net income; conversely, credit
Income Summary and debit Owner's Capital if a net loss exists.
4. Debit Owner's Capital for the balance in the Owner's Drawing account and credit Owner's Drawing
for the same amount.

Locating Errors
Errors in a trial balance generally result from mathematical mistakes, incorrect postings, or simply
transcribing data incorrectly. What do you do if you are faced with a trial balance that does not balance?
First determine the amount of the difference between the two columns of the trial balance. After this
amount is known, the following steps are often helpful:
1. If the error is P1, P10, P100, or P1,000, re-add the trial balance columns and re-compute the account
balances.
2. If the error is divisible by 2, scan the trial balance to see whether a balance equal to half the error has
been entered in the wrong column.
3. If the error is divisible by 9, retrace the account balances on the trial balance to see whether they are
incorrectly copied from the ledger. For example, if a balance was P12 and it was listed as P21, a P9
error has been made. Reversing the order of numbers is called a transposition error.
4. If the error is not divisible by 2 or 9, scan the ledger to see whether an account balance in the amount
of the error has been omitted from the trial balance, and scan the journal to see whether a posting of
that amount has been omitted.

Sample Theory Questions

1. Which of the following statements is not correct?
A. The audit trial should be used to trace data through the accounting records to find and correct
errors.
B. If the postclosing trial balance does not balance, there are errors in the accounting records.
C. The balance of the owner's capital account on the adjusted trial balance will ordinarily be different
than that reported on the postclosing trial balance.
D. The balance of the owner's capital account, as reflected on the postclosing trial balance, will
match the amount reported on the income statement.
2. The entry to transfer a net loss to the owner's capital account would include a debit to
A. The owner's capital account and a credit to Cash.
B. The owner's drawing account and a credit to the owner's capital account.
C. Income Summary and a credit to the owner's capital account.
D. The owner's capital account and a credit to Income Summary.
3. One purpose of closing entries is to
A. Transfer the results of operations to owner's equity.
B. Reduce the owner's capital account balance to zero so that the account is ready for the next
period.
C. Close all accounts so that the ledger is ready for the next accounting period.
D. Adjust the ledger account balances to provide complete and accurate figures for use on financial
statements.
Review Class for ACT111-0 and ACT112-0 E.T Yuchengco School of Business and Management

4. Which of the following accounts will appear on the post-closing trial balance?
A. The owner's drawing account. C. The owner's capital account.
B. Fees Income. D. Rent Expense.
5. When the totals in the debit and credit columns of the Adjusted Trial Balance section of a worksheet
are moved to their correct corresponding columns in the Income Statement and Balance Sheet
sections of the worksheet, which of the following will occur?
A. The debit column of the Income Statement section will equal the debit column of the Balance
Sheet section.
B. The peso amount difference between the debit and credit column totals of the Income Statement
section should be equal to the peso amount difference between the debit and credit column totals
of the Balance Sheet section.
C. The difference between the credit column of the Income Statement section and the debit column
of the Balance Sheet section is equal to the net income or net loss for the period.
D. The credit column total of the Income Statement section will be equal to the credit column total of
the Trial Balance section plus the credit column total of the Adjustments section.

Computational Drills
1. Emil Skoda Company had the following adjusted trial balance.

Emil Skoda Company

Adjusted Trial Balance
For the Month Ended June 30, 2014

Account Titles Debits Credits

Cash P 3,712
Accounts Receivable 3,904
Supplies 480
Accounts Payable P 1,792
Unearned Revenue 160
Emil Skoda, Capital 5,760
Emil Skoda, Drawing 300
Service Revenue 4,064
Salaries Expense 1,344
Miscellaneous Expense 256
Supplies Expense 2,228
Salaries Payable 448 ______
P12,224 P12,224

Instructions: Prepare closing entries at June 30, 2014.

2. Yin & Yang Video has the following unadjusted trial balance as of January 31, 2012.

Yin & Yang Video

Unadjusted Trial Balance
January 31, 2012

Debit Credit
Cash P 19,000
Accounts Receivable 34,100
Supplies 4,464
Prepaid Insurance 4,800
Equipment 108,000
Notes Payable P 45,000
Accounts Payable 9,650
Chea Wynn, Capital 69,400
Chea Wynn, Drawing 23,500
Fees Earned 356,000
Wages Expense 204,000
Rent Expense 41,700
Advertising Expense 19,800
Gas, Electricity, and Water Expense 11,340 _______
P470,704 P480,050
Review Class for ACT111-0 and ACT112-0 E.T Yuchengco School of Business and Management

The debit and credit totals are not equal as a result of the following errors:
a. The balance of cash was overstated by P10,000.
b. A cash receipt of P6,100 was posted as a debit to Cash of P1,600.
c. A debit of P3,500 to Accounts Receivable was not posted.
d. A return of P415 of defective supplies was erroneously posted as a P451 credit to Supplies.
e. An insurance policy acquired at a cost of P800 was posted as a credit to Prepaid Insurance.
f. The balance of Notes Payable was overstated by P9,000.
g. A credit of P1,450 in Accounts Payable was overlooked when the balance of the account was
determined.
h. A debit of P2,500 for a withdrawal by the owner was posted as a debit to Chea Wynn, Capital.
i. The balance of P18,900 in Advertising Expense was entered as P19,800 in the trial balance.
j. Miscellaneous Expense, with a balance of P3,060, was omitted from the trial balance.

Instructions: Prepare a corrected unadjusted trial balance as of January 31 of the current year.