Fundamentals of Accounting Part 1

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Completing the Accounting Cycle

Module 007 Completing the Accounting Cycle

This module covers the completion of the accounting cycle. Topics to be

discussed include the following: definition of accounting cycle, the worksheet
or spreadsheet, closing entries, post-closing trial balance, reversing entries.
After studying the module, the students should be able to
1. Define accounting cycle.
2. Recall and enumerate the steps in the accounting cycle.
3. Prepare an accounting worksheet.
4. Use accounting worksheet in preparing the financial statements.
5. Learn the closing entries (for nominal accounts).
6. Prepare a post-closing trial balance.
7. Understand and prepare reversing entries.

Introduction
In the last three modules (4, 5, 6), we have learned the first seven steps in the accounting
cycle. In this module we will complete the cycle until the preparation of reversing entries
and we will also study the worksheet preparation. It is important for us to understand not
only the preparations but also the importance of these entries. The worksheet, although
not that important and optional, facilitates the easy preparation of the financial statements
especially for the new accountants.

Accounting Cycle
Accounting cycle is the process by which business entities prepared their financial
statements for a given accounting period. The cycle begins with the Analysis and recording
of business transactions and ends up in the preparation of the reversing entries. After one
accounting period of the business operations, the account balances are carried from one
period to another and the new accounting cycle starts with the beginning account balances.
The accounting cycle involves routine performances at two different periods:
1. During the period
a) Analyzing and journalizing the business transactions
b) Posting the journal entries to the ledger
2. End of the period
a) Adjusting some accounts, including journalizing,
And posting of the adjusting entries
b) Closing the nominal accounts, including the journalizing and posting of the
closing entries
c) Preparing the financial statements.

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d) Preparation of the post-closing trial balance which will be the preparation for
the next accounting period.

The Work Sheet

Some accountants use the work sheet as an aid in the accounting process. The work sheet
(spreadsheet, when we are doing this using excel in a computer) is a document that has
several columns (it can be 8-column, 10-column, or 12-column depending on the nature of
the business). Work sheet is not a financial statement; it is just a tool that helps
accountants prepare financial statements easier. This is optional, financial statements can
be prepared without this.

The different steps in preparing the work sheet

1. Enter the account titles and their unadjusted balances in the Trial Balance
columns (first two columns) of the worksheet. Total the amount in the respective
columns. The total debit must equal the total credit.
2. Enter the adjustments in the Adjustment columns (third and fourth columns) and
total. The total of both columns should be equal.
3. Combine the trial balance columns and the adjustment columns. Extend the
balances to the Adjusted Trial Balance. Both debit and credit columns must have the
same total.
4. Extend the amounts from the Adjusted Trial Balance, Assets, liabilities, Capital,
contra-accounts to the Balance Sheet columns, and revenue and expenses to the
Income Statement. Total the columns. You will notice the Income Statement columns
are not the same, so with the Balance Sheet columns.
5. Extract the difference between the total credit and total debit of the Income
Statement columns, the variance represents the net profit or net loss (net profit, if
total credit is greater than total debit; net loss, it the total debit is greater than total
credit).
6. Extract the difference between the total debit and total credit of the Balance Sheet
columns. The difference should be of the same amount with the difference in
number 5, simply because the difference is the net profit or net loss that will be
transferred to Capital account. If it is net profit, the amount will be extended to the
credit column of the balance sheet; otherwise, it should be on the debit side (for the
net loss).
7. Total all the Income Statement columns and the Balance Sheet columns; they are
all of the same footing (equal) now.
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Please find below the worksheet for Santos Repair Shop (our example from Module 6):

Santos Repair Shop

Accounting Work Sheet
For the Month Ended March 31, 2017

Adjusted Income
Account Titles Trial Balance Adjustments Trial Balance Statement Balance Sheet
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 180,000 180,000 180,000
Accounts Receivable 6,000 6,000 6,000
Notes Receivable 8,000 8,000 8,000
Supplies 1,000 (1) 550 450 450
Prepaid Rent 15,000 (2) 5,000 10,000 10,000
Equipment 100,000 100,000 100,000
Furniture 5,000 5,000 5,000
Accounts Payable 5,000 5,000 5,000
Notes Payable 50,000 50,000 50,000
Juan, Santos, Capital 180,000 180,000 180,000
Service Income 92,500 (6) 5,000 (7) 750 88,250 88,250
Salaries Expense 9,500 9,500 9,500
Utilities Expense 3,000 3,000 3,000
Total 327,500 327,500
Supplies Expense (1) 550 550 550
Rent Expense (2) 5,000 5,000 5,000
Accrued Interest Income (3) 80 80 80
Interest Income (3) 80 80 80
Depreciation -Equipment (4) 750 750 750
Accumulated Depreciation-Equipment (4) 750 750 750
Interest Expense (4) 500 500 500
Accrued Interest Expense (4) 500 500 500
Depreciation -Furniture (5) 208 208 208
Accumulated Depreciation-Furniture (5) 208 208 208
Unearned Service Income (6) 5,000 5,000 5,000
Accrued Service Income (7) 750 750 750
Doubtful Accounts Expense (8) 500 500 500 500
Allowance for Doubtful Accounts (8) 500 500
Total 13,338 13,338 330,288 330,288 20,008 88,330 310,280 241,958
Net Profit 68,322 68,322
Total 88,330 88,330 310,280 310,280

Preparing the Financial Statements

Referring to the work sheet, you can now prepare the financial statements easily as the
accounts are already sorted on where it should be used or placed. For the Income
Statement, all the accounts (revenues and expenses) whose amounts or balances are
extended in the income statement will be used. All the accounts (assets, contra accounts,
liabilities, capital) with their balances extended in the balance sheet columns are the ones
that will be arranged to form a Balance Sheet or Statement of Financial Position. Please
refer to the financial statements presented in Module 6. They are just the same.

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Recording the Adjusting Entries

Journalizing the adjusting entries can be done after preparing the work sheet and then will
be posted in the ledger. Most companies prepare or record the adjusting entries at the end
of the year only but work sheet can be used to prepare the financial statements monthly or
quarterly without recording (journalizing and posting ) these adjusting entries.
Please refer to our adjusting entries and posting to the ledger in Module 6.

Closing the Accounts

Closing the account is another step in the accounting process involving the setting of the
nominal or temporary accounts (revenues and expenses) and the drawing account to zero
balance for the next accounting period.
Again, we will reiterate the meaning and difference between the temporary accounts and
real accounts.
Temporary accounts, also called nominal accounts, are the revenue and expense
accounts related to a particular accounting period. They are found in the Income Statement.
The Drawing account that is used in proprietorship is also classified as nominal account.
These accounts are zeroed-out at the end of the period.
Real accounts or permanent accounts are account found in the Balance Sheet. Real
accounts consist of assets, liabilities, owner’s equity, contra-asset accounts which are not
closed at the end of the accounting period. This is because they are not used to measure
income. These accounts will only be closed when the business will be put to an end or will
be closed.
Closing entries transfer the balances of revenue, expenses, and owner’s drawing to the
capital account at the end of the period. In our previous modules, we have already learned
the effects of these elements to capital:
Revenues increase Capital or Owner’s Equity.
Expenses decrease Capital or Owner’s Equity
Withdrawals or Drawings decrease Capital or Owner’s Equity
The nominal accounts are not directly closed or transferred to Capital. They pass through
a controlling account that summarizes all their balances. The Controlling or intermediary
account being used is the Revenue and Expense Summary, also called Income
Summary or Profit and Loss Summary.
Although there are some authors that consider closing revenues, expenses, drawings, if
any, direct to the Capital account, as an alternative, since it will yield the same effect on
capital.
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Steps in Closing the Accounts

1. Debit each revenue account for the amount of its credit balance. (Revenues have
normal credit balances.) Credit the Revenue and Expense Summary (RES) account
for the total of all the revenues.
2. Credit each expense account for the amount of its debit balance (Expenses have
normal debit balances.) Debit the Revenue and Expense Summary for the total of all
expenses.
3. After steps 1 and 2, revenues and expenses balances will be zero. We will now get
the balance of the Revenue and Expense Account to Capital account.
If the total credit of the RES is greater than its total debit, the difference represents
the net profit; net loss, if the total debit of the RES is greater than the total credit.
To transfer the net profit or net loss to Capital:
If net profit - debit Revenue and Expense Summary and
Credit Owner’s Equity or Capital
If net loss - debit Owner’s Equity or Capital and
Credit Revenue and Expense Summary

4. Withdrawal or Drawing will be closed to the Owner’s Equity or Capital

Account by debiting Capital and crediting Drawing for the amount withdrawn by the
owner for personal use.

Another alternative of closing the balance of the controlling account-Revenue and

Expense Summary is to have it pass through the Drawing account first, before
closing the Drawing account balance to Capital account.

We will illustrate these steps using the Santos Repair Shop problem. Following are the
closing entries followed by the posting to the ledger.

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Below are the postings of closing entries to the accounts:

Accumul a ted Depreci a tion
Cash Furni ture Utilities Expense
Ba l . 180,000 5) 208 Ba l . 3,000 (CE) 3,000
Ba l . 208

Accounts Recei va bl e Al l owa nce for Interes t Expens e

Ba l . 6,000 Doubtful Accounts 4) 500 (CE) 500
8) 500 Ba l . 500 500
Ba l . 500

Notes Recei va bl e Accounts Pa ya bl e Rent Expens e

Ba l . 8,000 Ba l . 5,000 2) 5,000 (CE) 5,000
Ba l . 5,000 5,000

Suppl i es Notes pa ya bl e Depreci a tion- Equi pment

Ba l . 1,000 1) 550 Ba l . 50,000 4) 750 (CE) 750
Ba l . 450 Ba l . 750 750

Prepa i d Rent J. Sa ntos , Ca pi tal Depreci a tion-Furni true

Ba l . 15,000 2) 5,000 Ba l . 180,000 5) 208 (CE) 208
Ba l . 10,000 (ce) 68,322 Ba l . 208 208
Ba l . 248,322

Equi pment Accrued Servi ce Income Suppl i es Expens e

Ba l . 100,000 7) 750 1) 550 (CE) 550
Ba l . 750 Ba l . 550 550

Furni ture Servi ce Income Interes t Income

Ba l . 5,000 6) 5,000 Ba l . 92,500 (CE) 80 3) 80
(CE) 88,250 7) 750 80 Ba l . 80
93,250
88,250 Ba l . 88,250
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Accumul a ted Depreci a tion

Equi pment Sa l a ri es Expens e Doubtful Account Expens e
4) 750 Ba l . 9,500 (CE) 9,500 8) 500 (CE) 500
Ba l . 750 Ba l . 500 500

Accrued Interes t Income Unea rned Servi ce Income Accrued Interes t Expens e
3) 80 6) 5,000 4) 500
Ba l . 80 Ba l . 5,000 Ba l . 500

Revenue a nd Expens e Summa ry

(CE) 20,008 (CE) 88,330
(CE) 68,322
88,330 88,330

Post-Closing Trial Balance

Preparation of the post -closing trial balance is the last step in the accounting cycle. Post-
closing Trial balance is a list of accounts with their adjusted balances after the closing
entries are recorded and posted in the ledger.
Post-closing trial balance is also described as a balance sheet in trial balance form. It
contains all the permanent or real accounts – assets, liabilities, and capital. There are no
nominal accounts included because they are all closed or zeroed-out. This also confirms
the balances of the ledger in preparation for the next accounting period.
Below is the Post-closing Trial Balance of Santos Repair Shop.

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Santos Repair Shop

Post-Closing Trial Balance
March 31, 2017

Account Titles Debit Credit

Cash P180,000
Accounts Receivable 6,000
Allowance for Doubtful Accounts P 500
Notes Receivable 8,000
Accrued Interest Income 80
Accrued Service Income 750
Supplies 450
Prepaid Rent 10,000
Equipment 100,000
Accumulated Depreciation-Equipment 750
Furniture 5,000
Accumulated Depreciation- Furniture 208
Accounts Payable 5,000
Notes Payable 50,000
Accrued Interest Expense 500
Unearned Service Income 5,000
Juan, Santos, Capital 248,322
Total P 310,280 P 310,280

Reversing Entries
Reversing entries are entries prepared at the beginning of the next accounting period to
reverse some of the adjusting entries made in the previous accounting period.
Preparing the reversing entries is optional, even the GAAP don not require this. This is only
done for convenience and to save time.
Adjusting entries that are reversed at the start of the next accounting period are:
1. Accrued Expenses
2. Accrued Revenue
3. Prepaid Expenses – expense method
4. Unearned Income- income method

Accrued Expenses
Expenses not paid during the current accounting period are most likely paid in the next
accounting period. If the adjusting entry made for this is not reversed, and payment is
made, the account accrued expense is debited. If the reversing entry for this is made, all
expenses accrued or not will be debited to expense account.
Let us use our adjusting entry for Accrued Interest Expense for Santos Repair Shop on
March 31:
2017
Mar 31 AJE Interest Expense P500
Accrued Interest Expense P500

2017
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Apr 1 RE Accrued Interest Expense P500

Interest Expense P500

Apr 30 AJE Interest Expense P 1,000

Accrued Interest Expense P 1,000

2017
May 1 RE Accrued Interest Expense P 1,000
Interest Expense P1, 000

May 31 JE Notes Payable P50, 000

Interest Expense 1,500
Cash P51, 500
To record the payment of 12%, 90-day
Note (principal plus interest).
If the Adjusting entry (AJE) for March 1, 2017 is not reversed on April 1, and the Adjusting
entry for April 30 is not reversed on May 1 and the above –May 31 journal entry (JE) for the
payment was made on May 31, (why up to May 31? The term of the note is 90-day), the
accountant will be spending more time in tracing the amount to be debited to Accrued
Interest Expense and there is a possibility of committing an error.
If the adjusting entry is not adjusted, the entry below can be made upon payment on May
31:
May 31 Notes Payable P50, 000
Accrued Interest Payable 1,000
Interest Expense 500
Cash P51, 500
Accrued Revenue or Income
Accrued Revenues are income earned but not yet collected or not yet due for collection. It is
a receivable, an asset. We will use Example 2 of Accrued Revenues Adjusting entry which is:
March 31 Accrued Interest Income
(Or Interest Receivable) P 80
Interest Income P80
The reversing entry for this would be:
2017
April 1 Interest Income P80
Accrued Interest Income P80

So that upon collection on April 30, 2017, the journal entry would be:
Apr 30 Cash P160
Interest Income P160

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If the adjustment for accrued income is not reversed and collection is made, the journal
entry for the collection would be:
April 30 Cash P160
Accrued Interest Income P80
Interest Income 80

Prepaid Expenses – expense method

Prepaid expenses are expenses paid in advance. We have two methods of recording
the payment – the expense method and the asset method. It is the Expense method, when
what is purchased is debited to expense and credited to cash.
We will make use of our example in Santos Repair Shop for Prepaid expenses-Expense
method wherein our adjusting entry was
March 31 Supplies P 450
Supplies Expense P450

The reversing entry for this would be:

Apr 1 Supplies Expense P 450
Supplies P450
If we do not reverse the entry, Supplies Expense is already closed because of the closing
entry and Supplies account has a debit balance of P450. Assuming no additional purchases
was made and at the end of the next accounting period, these entries will be made:
Apr 30 AJE Supplies Expense P450
Supplies P450
Followed by a closing entry:
Apr 30 Revenue and Expense summary P450
Supplies Expense P450

Unearned Revenue - income method

Unearned income is revenues collected in advance. Under the income method, the
receipt of the customer’s payment is credited to Unearned Revenue or Income. Our sample
adjusting entry for Santos Repair Shop will be used.
The adjusting entry made was
March 31 Service Income P 5,000
Unearned Service Income P 5,000
The reversing entry would be:
Apr 1 Unearned Service Income P5, 000
Service Income P5, 000

If the above adjusting entry is not reversed, the entries at the end of the accounting period
would be:
Apr 30 AJE Unearned Service Income P5, 000
Service Income P5, 000
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Apr 30 CE Service Income P5, 000

Revenue and Expense Summary P5, 000

After all the reversing entries are made, the next accounting period of the firm will start
with recording new set of business transactions.

Glossary

Closing the accounts: making the balances of nominal accounts back to zero.
Post –closing trial balance: the trial balance extracted after the closing entries are posted
in the ledger in preparation for the next accounting period.
Reversing entries: selected adjusting entries that are reversed at the beginning of the next
accounting period.
Worksheet: the spreadsheet that aids in the preparation of the financial statements.

References and Supplementary Materials

Books and Journals
Cabrera, ME. B. (2010). Fundamentals of Accounting 1.Manila, Philippines: GIC
Enterprises and Co., Inc.

Horngren, C. T., Harrison, W. T. Jr., Bamber, L. S., (2002). Accounting (International

Edition). New Jersey, USA: Prentice Hall

Garcia, P.C., Mojar, B.Q. & Gemanil, B. A. (2006).Basic Accounting Concepts and
Procedures. Quezon City, Philippines: Rex Book Store, Inc.

Kimwell, M. B. (2009). Fundamentals of Accounting (Second Edition). Manila, Philippines.

GIC Enterprises and Co., Inc.
Online Supplementary Reading Materials
Lesson 4: Completing the Accounting Cycle
online.missouri.edu/exec/data/courses/2706/public/lesson04/lesson04.asp
Accessed: March 14, 2017

[PDF]The Accounting Cycle Completed

www.pearsoned.ca/highered/divisions/virtual_tours/slater/slater_sample.pdf
Accessed: March 14, 2017

The Accounting Cycle - Accounting Basics for Students.com

www.accounting-basics-for-students.com/accounting-cycle.html
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Accessed: March 14, 2017

Online Instructional Videos

Completing the Accounting Cycle - YouTube
https://www.youtube.com/watch?v=QehLKGCEDU0
Accessed: March 15, 2017

Chapter 4 Completing the Accounting Cycle - YouTube

https://www.youtube.com/watch?v=mdrgHgxwa8s
Accessed: March 15, 2017

Video 1 - Overview of the Accounting Cycle - YouTube

https://www.youtube.com/watch?v=3WLS63GpvSI
Accessed: March 15, 2017