COMPLETION OF THE ACCOUNTING CYCLE (SERVICE BUSINESS)
The Accounting Cycle is a series of steps accountants perform during an accounting period
relating to analyzing, recording, classifying, summarizing and reporting useful financial information. Its
purpose is to generate financial statements.
The steps in the accounting cycle are:
1. The transactions are analyzed by examining source documents.
Events are analyzed to find the impact on the financial position or to be more specific the
impacts on the accounting equation.
Documents such as receipt, an invoice, a depreciation schedule, and a bank statement, etc.
provide evidence that an economic event has actually occurred.
2. The transactions are journalized.
Transactions having an impact on the financial position of a business are recorded in the general
journal.
In the general journal, the transactions are recorded as a debit and a credit in monetary terms
with the date and short description of the cause of the particular economic event.
3. The journal entries are posted to the ledger.
Transactions recorded in the general journal are then posted to the general ledger accounts.
The accounts classify accounting data into certain categories and they are recorded in general
journal entries according to that classification.
Depending on the frequency of the transactions posting to ledger accounts may be less
frequent.
4. A trial balanced is prepared.
To determine the equality of debits and credits as recorded in the general ledger, an unadjusted
is prepared. It is a way to investigate and find the fault or prove the correctness of the previous
steps before proceeding to the next step.
Unadjusted trial balance makes the next steps of the accounting process easy and provides the
balances of all the accounts that may require an adjustment in the next step.
Trial Balance
SENIOR SERVICE CENTER
Trial Balance
December 31, 2020
Debits Credits
Cash 2065
Accounts Receivable 2220
Supplies 2000
Prepaid Insurance 2400
Land 20000
Office Equipment 1800
Accounts Payable 800
Unearned Rent 360
Jose Senior, Capital 25000
Jose Senior, Drawing 4000
Fees Earned 16340
Wages Expense 4275
Rent Expense 1500
Utilities Expense 455
Supplies Expense 800
Miscellaneous Expense 985
Total 42450 42450
5. The data needed to adjust the accounts are assembled.
Adjusting entries ensure that the revenue recognition and matching principles are followed. To
find the revenues and expenses of an accounting period adjustments are required.
Adjusting entries are required to be is because a transaction may have influence revenues or
expenses beyond the current accounting period and to journalize to the events that not yet
recorded.
Adjusting Entries
Date Description PR Debit Credit
2020
Dec. 31 Supplies Expense 56 1240
Supplies 15 1240
31 Insurance Expense 57 100
Prepaid Insurance 16 100
31 Unearned Rent 24 120
Rent Revenue 43 120
31 Wages Expense 52 250
Wages Payable 23 250
31 Accounts Receivable 13 500
Fees Earned 42 500
31 Depreciation Expense 54 50
Accumulated Depreciation 19 50
6. A worksheet is prepared.
Worksheet is a columnar sheet of paper used to summarize information needed to make the
adjusting and closing entries and to prepare the financial statements.
Work sheet includes the following:
1. Trial Balance Columns
2. Adjustment Columns
3. Adjusted Trial Balance Columns
4. Income Statement Columns
5. Balance Sheet Columns
Adjustments:
(a) The supplies account has a debit balance of P2,000. The cost of the supplies on hand at the
end of the period is P760.
(b) The prepaid insurance account has a debit balance of P2,400, which represents the
prepayment of insurance for 24 months beginning December 1.
(c) The unearned rent account has a credit balance of $360, which represents the receipt of
three months’ rent, beginning with December. Thus, the rent revenue for December is P120.
(d) Wages. Wages accrued but not paid at the end of December total P250.
(e) Fees accrued at the end of December but not recorded total P500.
(f) Depreciation of the office equipment is P50 for December.
Cross-referencing (by letters) the debit and credit of each adjustment is useful in reviewing the
work sheet. It is also helpful for identifying the adjusting entries that need to be recorded in the
journal.
SENIOR SERVICE CENTER
Work Sheet
For the Month Ended December 31, 2020
Account title Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 2015 2015 2015
Accounts Receivable 2220 e.500 2720 2720
Supplies 2000 a.1240 760 760
Prepaid Insurance 2400 b.100 2300 2300
Land 20000 20000 20000
Office Equipment 1800 1800 1800
Accounts Payable 800 800 800
Unearned Rent 360 c.120 240 240
Jose Senior, Capital 24950 24950 24950
Jose Senior, Drawing 4000 4000 4000
Fees Earned 16340 e.500 16840 16840
Wages Expense 4275 d.250 4525 4525
Rent Expense 1500 1500 1500
Utilities Expense 455 455 455
Supplies Expense 800 a.1240 2040 2040
Miscellaneous Expense 985 985 985
42450 42450
Insurance Expense b.100 100 100
Rent Revenue c.120 120 120
Wages Payable d.250 250 250
Depreciation Expense f.50 50 50
Accumulated f.50 50 50
Depreciation
2260 2260 43250 43250 9655 16960 33595 26290
Net Income 7305 7305
16960 16960 33595 33595
7. The financial statements are prepared.
Financial statements are prepared from the balances from the adjusted trial balance. The
financial statements are made at the very last of the accounting period.
Cash flow statement, Income statement, Balance Sheet and Statement of Owner’s Equity are
the financial statements that are prepared at the end of the accounting period.
This is the output of the accounting process, which is used by the interested parties both within
and out of the organization.
After completing the work sheet, you will be able to prepare the data needed for the following:
1. Income Statement
2. Capital Statement/Statement of Owner’s Equity
3. Balance Sheet/Statement of Financial Position
4. Statement of Cash Flows
For Statement of Cash Flows, the items are classified into operating activities, investing
activities, and financing activities.
Income Statement
SENIOR SERVICE CENTER
Income Statement
For the Month Ended December 31, 2020
Fees earned P 16840
Rent revenue 120
Total revenues P 16960
Less: Wages expense P 4525
Supplies expense 2040
Rent expense 1500
Utilities expense 455
Insurance expense 100
Depreciation expense 50
Miscellaneous expense 985
Total expenses 9655
Net income P 7305
Statement of Owner’s Equity
SENIOR SERVICE CENTER
Statement of Owner’s Equity
For the Month Ended December 31, 2020
Capital, December 01, 2020 P 24950
Add: Net Income for December 7305
Total P 32255
Less: Withdrawals 4000
Capital, December 31, 2020 P 28255
Statement of Financial Position (Balance Sheet)
SENIOR SERVICE CENTER
Statement of Financial Position
December 31, 2005
Assets
Current Assets
Cash P 2015
Accounts Receivable 2720
Supplies 760
Prepaid Insurance 2300
Total Current Assets P 7795
Non- Current Assets
Land P 20000
Office Equipment 1800
Less: Accumulated Depreciation 50
Total Non-Current Assets 21750
Total Assets P 29545
Liabilities
Current Liabilities
Accounts Payable P 800
Wages Payable 250
Unearned Rent 240
Total Liabilities P 1290
Owner’s Equity
Jose Senior, Capital 28255
Total Liabilities and Owner’s Equity P 29545
Statement of Cash Flows
SENIOR SERVICE CENTER
Statement of Cash Flows
For the Month Ended December 31, 2020
Cash Flows from Operating Activities
Cash received from customers P 1400
Payments for salaries and other operating expenses (3655)
Net cash used for operating activities (P 2255)
Cash flows from Investing Activities
Cash paid for purchase of plant assets (17680)
Cash flows from financing activities
Cash investment by the owner P 24950
Cash borrowed from the bank 1000
Cash withdrawal by the owner (4000)
Cash provided by financing activities 21950
Net Increase in Cash P 2015
Cash balance, December 01, 2020 0
Cash balance, December 31, 2020 P 2015
8. The closing entries are journalized and posted to the ledger.
At the end of an accounting period, closing entries are made to transfer data in the temporary
accounts to the permanent balance sheet or income statement accounts. Transferring the
balances of the temporary accounts or nominal accounts (e.g. revenue, expense, and drawing
accounts) to the owner’s equity or retained earnings account is used because these types of
accounts only affect one accounting period.
Closing Entries
Date Description PR Debit Credit
2020
Dec. 31 Fees Earned 42 16840
Rent Revenue 43 120
Income Summary 33 16960
31 Income Summary 33 9655
Wages Expense 52 4525
Rent Expense 53 1500
Depreciation Expense 54 50
Utilities Expense 55 455
Supplies Expense 56 2040
Insurance Expense 57 100
Miscellaneous Expense 58 985
31 Income Summary 33 7305
Jose Senior, Capital 31 7305
31 Jose Senior, Capital 31 4000
Jose Senior, Drawing 32 4000
*** note: Income Summary (debit balance for NET LOSS; credit balance for NET INCOME)
9. The post-closing trial balance is prepared.
To make sure that debits equal credits, the final trial balance is prepared. As the temporary ones
have been closed only the permanent accounts appear on the closing trial balance to make sure
that debits equal credits.
Post-Closing Trial Balance
SENIOR SERVICE CENTER
Post-Closing Trial Balance
December 31, 2020
Debits Credits
Cash 2015
Accounts Receivable 2720
Supplies 760
Prepaid Insurance 2300
Land 20000
Office Equipment 1800
Accumulated Depreciation 50
Accounts Payable 800
Wages Payable 250
Unearned Rent 240
Jose Senior, Capital 28255
Total 29595 29595
10. The reversing entries are journalized and posted to the ledger.
Posting closing entries is an optional step of the accounting cycle. A reversing journal entry is
recorded on the first day of the new period for avoiding double counting the amount when the
transaction occurs in the next period.
The primary objective of the accounting cycle in an organization is to process financial
information and to prepare financial statements at the end of the accounting period.
An accounting cycle is a continuous and fixed process that needs to be followed accordingly.
Maintenance of the continuity accounting cycle is important.
Adjusting Entries to be reversed:
1. Prepaid Expenses under Expense Method
2. Unearned Revenues under Revenue Method
3. Accrued Expense
4. Accrued Revenue
***note: Not all adjusting entries are reversed.
Reversing Entries when reversing entry is prepared
Date Description PR Debit Credit
2021
Jan. 01 Wages Payable 23 250
Wages Expense 52 250
07 Wages Expense 52 500
Cash 11 500
Accrued Revenue
Date Description PR Debit Credit
2021
Jan. 01 Fees Earned 42 500
Accounts Receivable 13 500
Reversing Entries when no reversing entry is prepared
Date Description PR Debit Credit
2021
Jan. 01 No Entry
07 Wages Payable 23 250
Wages Expense 52 1025
Cash 11 1275
i
MINI QUIZZER:
Identification
1. The excess of total revenue over total expenses.
2. A temporary account into which all income statement revenue and expense accounts are
transferred at the end of an accounting period.
3. Journal entries that are needed in order to update specific ledger accounts to reflect correct
balances at the end of an accounting period.
Multiple Choice
1. Which of the following will have a zero balance after the recording and posting of the closing
entries?
a. Office Supplies
b. Accounts Payable
c. Accounts Receivable
d. Professional Fees
2. Which of the following is not a required step in the accounting cycle?
a. Analyzing of transactions
b. Journalizing the transactions
c. Financial statement preparation
d. Reversing of adjusting entries
3. Which of the following is not showing on the post-closing trial balance?
a. Accounts Payable
b. Accounts Receivable
c. Supplies Expense
d. Owner’s Capital
4. What entries are prepared to bring the balances of the nominal accounts to zero?
a. Journal Entries
b. Adjusting Entries
c. Closing Entries
d. Reversing Entries
5. What is the excess of the total expense over the total revenue?
a. Income Summary
b. Net Income
c. Net Loss
d. Net Revenue
Classify each account as (A) Asset, (L) Liabilities, (R) Revenue and (E) expense.
1. Land
2. Wages Expense
3. Supplies
4. Unearned Rent Revenue
5. Interest Revenue
Complete this table by placing X in the correct column for each account
Permanent Temporary
[Link] Young, Drawing
[Link] Fees
[Link] Depreciation
[Link] Revenue
[Link] Expense
Reference: Warren. Completing the Accounting Cycle. Retrieved from
[Link]
