Financial Statement Preparation,

Closing Entries and

Reversing Entries
MODULE GOALS/LEARNING OBJECTIVES:
At the end of the session, the learners will be able to:
1. Prepare properly classified financial statements.
2. Prepare closing entries and ready the accounts for the next
reporting period.
3. Prepare post-closing trial balance to confirm the equality of debits
and credits of real accounts.
4. Prepare reversing entries to simplify accounting process for the next
accounting period.
Income Statement

• Reports the revenues and expenses for a specific period of time.

• Lists revenues first, followed by expenses.
• Shows net income (or net loss).
• Does not include investment and withdrawal transactions between the owner and the business in
measuring net income.
• Alternative terminology: The income statement is sometimes referred to as the statement of
operations, earnings statement, or profit and loss statement.

There are two presentation for cost and expenses:

1) Based on its NATURE – The expenses are presented according to their nature: depreciation,
advertising, transportation, employee benefits. This form is called the single-step form of
income statement.
2) Based on its FUNCTION – The expenses are presented based on its function or use: Cost of
sales or cost of service, selling or distribution expense, administrative expenses, finance cost,
to name a few.
 Income Statement
Observe the following rules in preparing the income statements:
1) Note that the statement consists of four parts: Heading, revenues
earned, expenses incurred and net income or profit.
2) The third line in the heading must always be for a time period.
3) Margin on the left side – the extreme margin is used to describe the
major sections and the inner margin is used to describe the accounts
contained in the major section.
4) Money columns on the right side – the extreme margin is for the
major amounts and the inner money column is for the amounts of
the described accounts.
5) Peso signs in the final money column (extreme right) are placed on
the first and last amounts.
6) A single rule is placed under the last figure to be added or
subtracted and a double line or rule is placed under the final figure.
7) Income from the principal line of operation called operation revenue
is always presented first followed by other income. Expenses may be
presented from the highest amount to the lowest amount
(describing order) in which case other expenses may be presented
first in the expense section of the income statement. Or these may
be arranged alphabetically. Interest expense being a financial cost is
always presented last. The rule is also the same in the arrangement
of the expenses in the supporting notes.
Owner’s Equity Statement

• Reports the changes in owner’s equity for a specific period of time.

• The time period is the same as that covered by the income statement.
Balance Sheet

• Reports the assets, liabilities, and owner's equity at a specific date.

• Lists assets at the top, followed by liabilities and owner’s equity.
• Total assets must equal total liabilities and owner's equity.
• Is a snapshot of the company’s financial condition at a specific moment in
time (usually the month-end or year-end).

There are two presentation of Statement of Financial Position:

1) Account Form – Assets are listed on the left hand column of the report
with the liabilities and owner’s equity listed on the right hand column.
2) Report Form – Shows in one straight column the assets followed by the
liabilities and owner’s equity.
 Balance Sheet
Observe the following rules in presenting the statement if financial position:
1) The heading consists of three lines:
a. Name of the Business
b. Title of the Report
c. Date

2) Margin of the left side for the major classification:

The extreme left margin is used for describing the major classifications
like current assets or current liabilities and the inner margin is used for
describing the accounts herein like cash, accounts receivable and Prepaid
Expenses.

3) Money columns on the right side:

The placement of the amounts usually follows the margin on the left
side: Extreme right money column for the major amounts following the major
classifications like: P41,500, P145,000 and P186,500 and an inner money
column for the amounts of the described accounts like P21,000, P16,000 and
P4,500.

4) In the final money column, the peso sign is placed on the first and last
amounts per accounting value; while in the inner money column, the peso sign
is placed on the first amount of every column of figures.

5) A single line or rule is placed under the last figure to be added or subtracted
and a double line or rule is placed under the final figure.
 Statement of Cash Flows
Information on the cash receipts and payments for a specific period of time.
Answers the following:
►Where did cash come from?
►What was cash used for?
►What was the change in the cash balance?
 Closing Entries:
Closing the books means bringing the temporary or nominal accounts to zero balance by transferring them to the
capital account or the owner’s equity. After the closing entries, the books are cleared.
On the other hand, carry forward the balances of the assets, liabilities, and owner’s equity to the next accounting
period.
In making the closing entries, the income statement column of the worksheet should be used as a guide. The title
Income Summary is an account used to close the nominal values and bring them to the capital account. The following
are the steps in making the closing entries:

1) The revenue accounts such as Service income, Printing income and commission income which normally are
credit balances should be closed on the debit side and credited to the Income Summary account.
2) The expense accounts such as Salaries expense and Utilities expense which usually are debit balances should be
closed on the credit side and debited to the Income Summary account.
3) Determine the balance of the Income Summary account which is a net income or a net loss. If credit balance, it
indicates net income. If debit balance, it indicates net loss. Debit or Credit the Income Summary account to
increase or decrease the Owner’s equity account.
4) The drawing account which normally is a debit balance is credited to close and debited to the capital account to
bring a reduction.
Closing Entries:
 Preparing a Post-closing Trial Balance
The post-closing trial balance is prepared after closing the books and contains
only real accounts with balances. It has the same accounts as those found in
the statement of financial position.
Opening Entry:

To forward the accounts with balances to the next accounting period an

opening entry will be prepared on the post closing trial balance:
Reversing Entries:

These are the opposite of adjusting entries and are prepared of the first day
of the succeeding reporting period. Prepaid expenses under the expense
method and Deferred Income under the income method are the only items
being reversed. The reasons for making reversing entries are the following:
1) To close out the accounts created when the adjusting entries were
prepared such as the prepaid expense (under the expense method) and
the unearned income (under the income method)
2) To recognized the expired/income portion applicable for the succeeding
period.
3) To simplify the bookkeeping entries in the following accounting period.
SOURCE:
• 21st Century Accounting Process; 2015 edition, by Zenaida Vera Cruz-
Manuel
Thank you ☺