BAB X

Closing and Reversing Journal

Discussion Material

11.1. Introduction to Closing Journal

11.2. Book Closing Stages

11.3. Practice Making Closing Journal

11.4. Introduction to Inverting Journal

11.5. Practice Making Reverse Journal

Learning objectives:

1. Able to explain the concept of closing journal

2. Be able to explain the stages of closing the book

3. Able to make closing journal

4. Able to explain the concept of reversing journal

5. Able to make reversing journal

10.1. Introduction to Closing Journal

Closing entries are accounting records used to close the process and the accounting cycle stages
of merchandising, service, and manufacturing firms. This activity known as closing the book or
closing, namely by moving estimates nominal to retained earnings (retained earnings). Purpose
of closing is entering other than to do 'closing' at the end of the accounting period as well as to
prepare the accounts used in the next period. So the closing journal and trial balance after closure
cannot be separated (Beke, 2013).

Closing the books is the process of moving nominal accounts and divisions dividends to the
retained earnings account so that at the end of the period it will get equity value. Close the book
at the end of the year and close the book at the end of the month or close the monthly book,
basically both are the same. So, closing journal is the end of a company's accounting cycle. At
the end of the accounting cycle, to carry out the process of closing accounts using journal entries
closing. In other words, the definition of closing entries is the journal used to close processes in
the accounting cycle and prepare for recording accounts for transactions for the next period
(Beke, 2013).

The purpose of closing the book is:

1) To separate or cut off between periods.

2) Determine the profit and loss at the end of the period.

3) Make a Statement of Financial Position.

4) To Separate documents and archives of business financial transactions.

5) Assess the company's performance.

6) Knowing the company's assets

7) To measure the company's ability to fulfil its obligations.

Basically, the recording of the closing journal entry for a trading company is divided into two
parts:

Methods, namely the periodic and perpetual methods, the following is an explanation:

1) Periodic Method of Recording

For this periodic method, it is widely used by trading companies’ that sell goods at affordable
prices, so this method is usually used at the end of the period. However, using this method also
has drawback is that you as a business owner cannot know how much large amount of your
inventory at any given time. Why is that? This method does not have a recording of the purchase
of goods in the debit or the sale of goods on a credit position. Besides the calculation the amount
of inventory can only be done by adjusting the number of goods only available, through a
physical calculation process for each period. Even this method will be difficult to use if used by
large companies, because:

The business also has a process for inventory flow of goods in and out tall. In conclusion,
making closing entries using this method will be recorded the time when there is a purchase and
sale transaction, namely the purchase account in the debit, and on the sales account the credit
position. Unless you want to record HPP this cannot be done with this periodic method.

2) Perpetual Method of Recording

The perpetual method used by trading companies, usually selling goods at a fairly high price.
Even this method is carried out detailed and continuous on all transactions. As a result, recording
this method becomes more detailed to complex, but the advantage is inventory your goods can be
known whenever you want. In addition to recording this level of accuracy is also higher than the
periodic method even purchase transactions will be recorded in the inventory account on Debit.
Sales will record inventory with cost of goods credited.

10.2. Book Closing Stages

The following are four stages in making closing journals along with examples.

1. Closing Income Account on Credit Balance

The first stage of the closing journal is to close the existing account in the balance credits such as
sales or revenue to the income summary account. For example, the closing entry for a
merchandising company that has sales of IDR 287,000,000, besides that the company also
received rental income of IDR 25,000,000. Then the journal entries on December 31, 2020 are:

Sales Revenue IDR 287,000,000

Rent Income IDR 25.000.000
Profit and Loss Summary IDR 312,000,000

2. Closing Expense Account on Debit Balance

Next close the expense account on the balance on Debit, which is usually this expense including
sales discounts, returns and allowances, cost of goods sold, shipping costs and other expenses to
the income statement. In the picture below is example of closing an expense account.
 Date Name of Account Debit Credit
31 Desember 2020 Income Summary Rp. 289.430.000
Sales Returns and Rp. 2.000.000
Allowances
Sales Discount Rp. 3.290.000
Sales Salary Expense Rp. 45.000.000
Cost of goods sold Rp. 155.000.000
Advertising expenses Rp. 8.000.000
Shipping Costs Other Rp. 2.880.000
Selling Expenses
Office salary expense Rp. 1.470.000
Rental expenses Rp. 35.000.000
Depreciation Expense Rp. 25.450.000
Insurance Expenses Rp. 3.560.000
Consumables Load Rp. 2.545.000
Miscellaneous Rp. 1.245.000
Administrative
Expenses
Interest expense Rp. 550.000

3. Close the Profit and Loss Summary Account Balance

Next, by closing the balance of the income summary account, it means that it will also close
owner's capital account. This method has two possible stages, namely as an example the closing
journal for a trading company is as follows:

If the company has a profit, then the recording of the income summary accounts in a position on
Debit.

Profit and Loss Summary IDR 95,200,000

Owner's Capital IDR 95,200,000

However, if the company suffers a loss, then the profit summary account is recorded loss is on
credit.

Owner's Capital IDR 95,200,000

Profit and Loss Summary IDR 95,200,000

4. Closing Private Account (Withdrawal) For Owner

Finally, at this stage, by closing the owner's capital withdrawal account,

An example of a closing journal entry for a trading company is as follows:

Capital IDR 27,000,000
Privet IDR 27,000,000

10.3. Practice Making Closing Journal

Practical steps:

1) Reopen the practice question file the accounting spreadsheet that has been used in BAB
previously

2) Prepare a new sheet, name it: "Closing Journal"

3) It is known that the income statement is as follows:

Income
Others

4) Based on the income statement, make a journal as shown below this:

Closing Journal
Account Debit Credit
Closing Income:

Income Rp. 2.000.000

Profit and loss Rp. 2.000.000
Closing Load:

Profit and loss Rp. 500.000

Etc Rp. 500.000
Closing Profit and Loss
Summary:
\
Profit and loss Rp. 1.500.000
Capital Rp. 1.500.000

10.4. Introduction to Inverting Journal

A reversing journal is a journal for reversing an adjusting entry that creates a balance sheet
account. If not reversed there will be a double account. In other words a journal that has another
term for this reverse entry which is made at the beginning of the accounting period

The next step is to reverse the adjusting entry that gives rise to the new real estimate.
This journal is a journal that was deliberately created to reverse some journals certain
adjustments that have been prepared in the previous period (Jusup, 2011).

The preparation of this journal in the accounting process or cycle is optional, meaning we

You can make reversing journals and you can also not make reversing journals.

The functions of making reversing journals include:

1. Facilitate the recording of transactions at the beginning of a new accounting period, especially
those relating to adjusting entries.

2. Simplify the preparation of journals in the next accounting period. Journal reversing can
provide benefits when companies make journal entries that there are many.

3. Minimize errors or mistakes that may occur, such as avoid double recognition of costs or
revenues due to the preparation of paragraphs adjusting journal entry.

10.5. Accounts Requiring Reversal Journals

Not all accounts in adjusting entries require reversing entries. The sign that an adjusting journal
account requires this entry is when account adjusting journal entries create new real accounts that
are not visible on the trial balance (Warren et al., 2016). Some adjusting journal accounts that
require journal entries returns include:

1. Accrued expenses

Expenses still have to be issued/paid by the company at the end of the period accounting. So, the
expense will continue in the accounting period next.

2. Prepaid expenses (if recorded as expenses)

Prepaid expenses are expenses that have been paid but have not been recorded as an expense for
the period. This prepaid expense usually occurs when:

The company pays the transaction costs of the company's expenses for the period certain.

3. Income that will still be received

Revenue that will still be received is income that has already occurred but for some reason it has
not been recognized as company revenue.

4. Unearned income (if recorded as revenue)

Unearned income is income received by the company at the beginning of the transaction that has
not been made to the customer.

5. Use of equipment (if recorded as an expense)

Equipment used continuously by the company later recorded as an expense in the adjusting
entry.

 Examples of Reversing Journal Transactions

1. Prepaid Expenses

Expenses have been paid in advance or recorded as expenses. So made reversing entries to
become prepaid rent or become assets.

For example, on December 1 2017 paid rent for 1 year amounting to Rp. 2,400,000, is recorded
in the journal as follows.

Rent expense IDR 2,400,000 (D)

Cash IDR 2,400,000 (K)

On December 31, 2017, the adjusting entries were made as follows.

Prepaid rent IDR 2,200,000 (D)

Rent expense IDR 2,200,000 (K)

The reversing entry for the above transaction is as follows.

Rent expense IDR 2,200,000 (D)

Prepaid rent IDR 2,200,000 (K)

2. Unearned Income

Unrealized rental income will be recorded as income.

A reversing entry is made here to convert the income as rent accepted upfront. For example, on
September 1, 2017 the company has received rental income of Rp. 2,400,000 for 6 months. the
journal that made at the time of the transaction is as follows.

Cash IDR 2,400,000 (D)

Rental income IDR 2,400,000 (K)

On December 31, 2017, the following adjusting entries were made.

Rental income IDR 800,000 (D)
Rent received in advance Rp800,000 (K)

The reversing entry for the transaction is as follows.

Rent received in advance Rp800,000

Rental income IDR 800,000

3. Unpaid Expenses

For example, on December 31, 2017 there is a salary for December which is have not been paid
by the company with the details of the funds as follows.

– for sales employees of Rp. 1,750,000, and

– for office employees Rp. 1,500,000.

The salary is paid every January 4, 2018. Journal entry adjustments made as of December 31,
2017, are as follows.

Salary expense for sales department Rp. 1,750,000 (D)

Office employee salary expense Rp.1,500,000 (D)
Salary payable IDR 3,250,000 (K)

At the beginning of the period, January 1, 2018, a reversing entry was made as following.

Salary payable IDR 3,250,000 (D)

Salary expense for sales department Rp. 1,750,000 (K)
Office employee salary expense Rp.1,500,000 (K)

The journal entries made at the time of payment of salaries are as follows:

Salary expense for sales department Rp. 1,750,000 (D)

Office employee salary expense Rp.1,500,000 (D)
Cash IDR 3,250,000 (K)

4. Unearned Income

For example, every May 1 and November 1 the company receives interest of IDR 600,000.
Adjusting entries made on December 31 2017, which are as follows.

Interest receivable Rp600,000 (D)

Interest income IDR 600,000 (K)

The reversing journal entries made on January 1, 2018, are as follows.

Interest income IDR 200,000 (D)

Interest receivable Rp.200,000 (K)

The journal entries made at the time of payment on May 1 2018 are:

Cash IDR 600,000 (D)

Interest receivable Rp600,000 (K)

10.6. Practice Making Reverse Journal

Practical steps:

1) Reopen the accounting spreadsheet practice question file that has been used in the previous
chapter

2) Prepare a new sheet, name it: "Reversing Journal"

3) Question for reversing journal: Transactions that occurred in Bintang Jaya 1

October 2021 paid rent of Rp 1,200,000 for 1 year. You asked to make the necessary journals.

4) So the general form of the journal is as follows:

Bintang Jaya
General Journal
October 1st, 2021
Date No Account Desc R Debit Credit
Account ef
1-Oct- 6103 Rental expenses Expense Rp. 1.200.000
2021 Payment
1101 Cash Expense Rp. 1.200.000
Payment

5) Prepare the adjusting entries as follows:

Bintang Jaya
Adjusting Journal Entry
December 31st, 2021
Date No Account Desc R Debit Credit
Account ef
31-Dec- 1104 Prepaid lease Expense Rp. 900.000
2021 Payment
6103 Rental expenses Expense Rp. 900.000
Payment

6) Next, make a closing journal as shown below:

Bintang Jaya
Closing Journal
December 31st, 2021
Date No Account Desc R Debit Credit
Account ef
31-Dec- 4103 Profit and Loss Expense Rp. 300.000
2021 Payment
6103 Rental expenses Expense Rp. 300.000
Payment

10.7. Summary

1. Closing journal serves to close all processes and stages of the accounting cycle company.

2. Reversing entries are used to reverse adjusting entries from balance sheet accounts and used to
facilitate recording transactions at the beginning of the next period.

3. The functions in the spreadsheet are very supportive for making closing journals and reversals
in the accounting cycle.

10.8. Exercise

The following is an overview of transactions at PT Pacific in 2019:

1) Purchased office supplies worth Rp. 1,000,000. Based on physical calculations on

On December 31, 2019, it was recorded that there were unused supplies of Rp 250,000.

2) On April 31, 2019 PT Pacific paid the insurance premium for the period of one year coverage
of Rp. 1,350,000.

3) Purchased Office equipment for Rp. 4,800,000 on March 1, 2019. Equipment

The office is estimated to be able to be used for 8 years.

4) Received cash worth IDR 650,000 on April 1, 2019 for room rental for 3 years ending on
March 31, 2021.

Based on the transaction using a Spreadsheet, with the following conditions:

1. Journalize the Transaction

2. Prepare Adjusting Entries as of December 31, 2019

3. Make a Closing Journal