CHAPTER 4

COMPLETING THE
ACCOUNTING CYCLE
CLOSING THE BOOKS

Source Material |
Accounting Principles 10th Ed. (Weygandt, Kimmel, Kieso)
LECTURE OVERVIEW

B Broaden understanding
of Business Context
AA ccount for Transactions
& Master Recording
A Analyze the
Financial Statement

• LO1 | State the required steps in • LO3 | Explain the process of closing • LO5 | Appreciate post-closing
the Accounting Cycle the books trial balance

• LO4 | Master the different Journal • LO6| Understand the classified

• LO2 |Familiarize ourselves with a entries statement of financial position
worksheet ⚬ Adjusting
⚬ Closing
⚬ Correcting
⚬ Reversing Entries

0.0
 L01

ACCOUNTING
CYCLE STEP-BY-STEP
3 MAJOR PHASES IN ACCOUNTING

ACCOUNTING

IDENTIFY RECORDS COMMUNICATES

• Which transactions to record? • How to record economic events? • How do we analyze?
￭ Classifies ￭ Prepare Reports
￭ Summarizes ￭ Interpret for Users

L01.1
 B/S RE I/S
BALANCE SHEET CHANGES IN EQUITY INCOME STATEMENT
 ASSETS  OWNER’S CAPITAL NET INCOME /  REVENUES
TOTAL EQUITY
 LIABILITIES  NET INCOME/ LOSS NET LOSS  EXPENSES
 EQUITY  OWNER’S DRAWINGS
 B/S RE I/S
BALANCE SHEET CHANGES IN EQUITY INCOME STATEMENT
 ASSETS  OWNER’S CAPITAL NET INCOME /  REVENUES
TOTAL EQUITY
 LIABILITIES  NET INCOME/ LOSS NET LOSS  EXPENSES
 EQUITY  OWNER’S DRAWINGS
 Adjusting Entries

Unadjusted

Adjusted

B/S RE I/S
BALANCE SHEET CHANGES IN EQUITY INCOME STATEMENT
 ASSETS  OWNER’S CAPITAL NET INCOME /  REVENUES
TOTAL EQUITY
 LIABILITIES  NET INCOME/ LOSS NET LOSS  EXPENSES
 EQUITY  OWNER’S DRAWINGS
THE ACCOUNTING CYCLE
1 Analyze the business transaction
2 Journalize the transaction
3 Post to ledger accounts
4 Prepare an unadjusted trial balance
5 Journalize and post adjusting entries
6 Prepare the adjusted trial balance

7 Prepare financial statements

8 Journalize and post closing entries

9 Prepare post-closing trial balance

 THE ACCOUNTING CYCLE
1 Analyze the business transaction

Daily 2 Journalize the transaction

3 Post to ledger accounts
4 Prepare an unadjusted trial balance
5 Journalize and post adjusting entries
Periodically
6 Prepare the adjusted trial balance

7 Prepare financial statements

8 Journalize and post closing entries

Annually
9 Prepare post-closing trial balance
 L02

INTRODUCING THE:
THE WORKSHEET
CHART OF ACCOUNTS

WORK
SHEET
• Helps provide F/S info at an earlier date
• This also serves as basis for F/S
(instead of adjusted Trial Balance)
• Optional - merely a tool to organize date

L01.2
 CASE STUDY:

RRCPAJ Co.
P3.1
 1 2 3
1 Plug-in | Unadjusted Trial Balance
Account Unadjusted
Trial Balance
Adjusting Entries Adjusted
Trial Balance
DR CR DR CR DR CR 2 Plug-in | Adjustments
101 Cash 3,500 3,500
112 Accounts Receivable 6,000 1,700 7,700
3 Plug-in | Adjusted Trial Balance
126 Supplies 1,900 900 1,000
130 Prepaid Insurance 3,600 150 3,450
149 Equipment 11,400 11,400
150 Accumulated Depreciation – Equipment 190 190
201 Accounts Payable 4,500 250 4,750
209 Unearned Service Revenue 2,000 1,600 400
212 Salaries and Wages Payable 1,104 1,104
301 R. Rey , Capital 18,700 18,700
302 R. Rey , Drawings 1,000 1,000
400 Service Revenue 9,500 1,600 1,700 12,800
631 Supplies Expense 900 900
717 Depreciation Expense 190 190
722 Insurance Expense 150 150
726 Salaries and Wages Expense 6,400 1,104 7,504
729 Rent Expense 900 900
732 Utilities Expense 250 250
34,700 34,700 5,894 5,894 37,944 37,944
 4 5
4 Create | Income Statement
Account
Adjusted Trial Balance Income Statement Statement of Financial
Position
DR CR DR CR DR CR 5 Create | Financial Statement
101 Cash 3,500 3,500 RRCPAJ CO.
112 Accounts Receivable 7,700 7,700 RRCPAJ CO.
6 Derive | ChangesAUGUST
in Owner’s Equity
126 Supplies 1,000 1,000 31, 2022
AUGUST 31, 2022
130 Prepaid Insurance 3,450 3,450
149 Equipment 11,400 11,400
150 Accumulated Depreciation – Equipment 190 190
$$
201 Accounts Payable 4,750 4,750
209 Unearned Service Revenue 400 400
212 Salaries and Wages Payable 1,104 1,104
$
301 R. Rey , Capital 18,700 18,700
302 R. Rey , Drawings 1,000 1,000 $
400 Service Revenue 12,800 12,800
631 Supplies Expense 900 900
717 Depreciation Expense 190 190 $
722 Insurance Expense 150 150
726 Salaries and Wages Expense 7,504 7,504
729 Rent Expense 900 900
732 Utilities Expense 250 250
$$
37,944 37,944 9,894 12,800 28,050 25,144
Net Income 2,906 2,906
12,800 12,800 28,050 28,050

R. Rey, Capital
$
 THE ACCOUNTING CYCLE
1 Analyze the business transaction

Daily 2 Journalize the transaction

3 Post to ledger accounts
4 Prepare an unadjusted trial balance
5 Journalize and post adjusting entries
Periodically
6 Prepare the adjusted trial balance

7 Prepare financial statements

8 Journalize and post closing entries

Annually
9 Prepare post-closing trial balance
CHART OF ACCOUNTS

WORK
SHEET
• Helps provide F/S info at an earlier date
• This also serves as basis for F/S
(instead of adjusted Trial Balance)
• Optional - merely a tool to organize date

L01.2
 THE ACCOUNTING CYCLE
1 Analyze the business transaction

Daily 2 Journalize the transaction

3 Post to ledger accounts
4 Prepare an unadjusted trial balance
5 Journalize and post adjusting entries
Periodically
6 Prepare the adjusted trial balance

7 Prepare financial statements

8 Journalize and post closing entries

Annually
9 Prepare post-closing trial balance
 L03

CLOSING
THE BOOKS
WALKTHROUGH
WHAT DO WE MEAN BY CLOSING THE BOOKS?

“CLOSING THE BOOKS”

• Happens at the end of the accounting period
• Make accounts ready for the next period

*Company closes temporary accounts.

L02.1
2 TYPES OF ACCOUNTS DURING CLOSING

TEMPORARY PERMANENT
ACCOUNTS ACCOUNTS
(nominal accounts) (real accounts)

Relate to only 1 given accounting period Relate to 2 or more future accounting periods

Close ACCOUNTS DON’T Close ACCOUNTS

LO2.2
SO HOW DO WE ACTUALLY
“CLOSE” TEMPORARY ACCOUNTS
SUBSEQUENT MEASUREMENT
 I/S RE B/S
INCOME STATEMENT CHANGES IN EQUITY BALANCE SHEET
 REVENUES  OWNER’S CAPITAL  ASSETS
 EXPENSES  NET INCOME/ LOSS  LIABILITIES
TOTAL EQUITY
 NET INCOME  OWNER’S DRAWINGS  EQUITY
NET INCOME/LOSS  ENDING CAPITAL

RRCPAJ CO.
RRCPAJ Co. RRCPAJ Co. STATEMENT
Statement OF
of FINANCIAL POSITION
Financial Position
As of August 31, 2022
INCOME Statement
Income STATEMENT Statement of OF
STATEMENT Changes inOWNER’S
CHANGES IN Owner’s Equity
EQUITY
For the month ended August 31, 2022 For the month ended August 31, 2022 ASSETS
Cash $ 3,500
Income Accounts Receivable 7,700
R.ReY, Capital, Beginning $ 0
Service Revenue $ 12,800 Supplies 1,000
Add:
Expense Investment 18,700
Prepaid Insurance 3,450
Equipment $ 11,400
Salaries and Wages Expense $ 7,504 Net Income 2,906 Less: Accumulated (190) 11,210
Rent expense 900 Depreciation
21,606
Total Assets $ 26,860
Supplies expense 900 Less: LIABILITIES AND OWNER’S EQUITY
Utilities expense 250 Drawings 1,000 Liabilities
Depreciation expense 190 1,000 Accounts Payable $ 4,750
Insurance Expense 150 9,894 Unearned Service 400
Revenue
NET INCOME $ 2,906 R.REY, Capital, Ending $ 20,606 Salaries and Wages 1,104
Payable
 STEP 1: “CLOSED” ALL REVENUE ACCOUNTS [TEMPORARY ACCOUNTS]
Total Liabilities 6,254
 STEP 2: “CLOSED” ALL EXPENSE ACCOUNTS [TEMPORARY ACCOUNTS]
 STEP 3: “CLOSED” NET INCOME  OWNER’S CAPITAL Owner’s Equity
 STEP 4: “CLOSED” OWNER’S DRAWINGS [TEMPORARY ACCOUNTS]  OWNER’S CAPITAL R. Rey, Capital 20,606
__________________________________________________________________ Total Liabilities and Owner’s Equity $ 26,860
We were able to determine the ending capital (PERMANENT ACCOUNT)
W H AT A R E C L O S I N G E N T R I E S ?

 CLOSE TEMPORARY ACCOUNTS

to Owner’s Capital
• Zero out Revenues
• Zero out Expenses
CLOSING • Zero out Owner’s Drawings

ENTRIES
 They are usually made on
Required at the end of the period. the last day of an accounting period
They close temporary accounts to capital.

LO2.1 LO3.2
1 CLOSE REVENUE ACCOUNTS
TO INCOME SUMMARY

CLOSE EXPENSE ACCOUNTS

2 TO INCOME SUMMARY

3 CLOSE INCOME SUMMARY

TO OWNER’S CAPITAL

4 CLOSE OWNER’S DRAWINGS

TO OWNER’S CAPITAL

LO2.3
 1 CLOSE REVENUE ACCOUNTS
TO INCOME SUMMARY

$ 12,800

$ 7,504
$ 900
CLOSE EXPENSE ACCOUNTS
$ 900
$ 250
2 TO INCOME SUMMARY
$ 190
$ 150
$ 12,800 $ 9,894

3 CLOSE INCOME SUMMARY

TO OWNER’S CAPITAL

4 CLOSE OWNER’S DRAWINGS

TO OWNER’S CAPITAL

*Kindly note that T-accounts should be per type of revenue and expenses. We just consolidated them for illustration purposes LO2.3
 Let’s close to I/S
1 CLOSE REVENUE ACCOUNTS
TO INCOME SUMMARY

$ 12,800 $$7,504
7,504
$ 900
$ 900
$ 250
$ 190
CLOSE EXPENSE ACCOUNTS
$ 150
2 TO INCOME SUMMARY

$ 12,800 INCOME SUMMARY $ 9,894

“ $ O.00 ” “ $ O.00 ”
3 CLOSE INCOME SUMMARY
REVENUE EXPENSE TO OWNER’S CAPITAL
CLOSED TO I/S CLOSED TO I/S

C-JE1 CLOSING ENTRY $ 9,894 $ 12,800

C-JE2 CLOSING ENTRY

$ 9,894 4 CLOSE OWNER’S DRAWINGS

Income Summary(CR)
Service Revenue (DR) $ 12,800 NET INCOME $ 2,906 TO OWNER’S CAPITAL
$ 7,504
Supplies Expense
$ 900
Income Summary(CR) $ 12,800 Depreciation Expense
$ 900
Insurance Expense
$ 250
Salaries & Wages Expense
$ 190
Rent Expense
$ 150
Utilities Expense

*Kindly note that T-accounts should be per type of revenue and expenses. We just consolidated them for illustration purposes LO2.3
 C-JE1 CLOSING ENTRY C-JE2 CLOSING ENTRY
CLOSE REVENUE ACCOUNTS
Service Revenue (DR) $ 12,800 Income Summary(CR) $ 9,894
1 TO INCOME SUMMARY
$ 7,504
Supplies Expense
Income Summary(CR) $ 12,800
Depreciation Expense
$ 900
$ 900
Insurance Expense
$ 250
Salaries & Wages Expense
$ 190
Rent Expense
$ 150
Utilities Expense
CLOSE EXPENSE ACCOUNTS
2 TO INCOME SUMMARY

3 CLOSE INCOME SUMMARY

TO OWNER’S CAPITAL

4 CLOSE OWNER’S DRAWINGS

TO OWNER’S CAPITAL

*Kindly note that T-accounts should be per type of revenue and expenses. We just consolidated them for illustration purposes LO2.3
 1 CLOSE REVENUE ACCOUNTS
TO INCOME SUMMARY

CLOSE EXPENSE ACCOUNTS

2 TO INCOME SUMMARY
$ 1,000

$ 1,000
NET INCOME $ 2,906

3 CLOSE INCOME SUMMARY

TO OWNER’S CAPITAL

4 CLOSE OWNER’S DRAWINGS

TO OWNER’S CAPITAL

*Kindly note that T-accounts should be per type of revenue and expenses. We just consolidated them for illustration purposes LO2.3
 1 CLOSE REVENUE ACCOUNTS
TO INCOME SUMMARY

CLOSE EXPENSE ACCOUNTS

2 TO INCOME SUMMARY

$ 1,000
$ 2,906

“ $ O.00 ”
DRAWINGS 3 CLOSE INCOME SUMMARY
“ $ O.00 ” $ 18,700
TO OWNER’S CAPITAL
INCOME SUMMARY CLOSED TO O/C
CLOSED TO O/C

C-JE3 CLOSING ENTRY

C-JE4 CLOSING ENTRY

$ 1,000 $ 21,606 4 CLOSE OWNER’S DRAWINGS

Income Summary(DR) $ 2,906 R. Rey Capital (DR) $ 1,000 TO OWNER’S CAPITAL
$ 20,606
R. Rey, Capital (CR) $ 2,906 R. Rey, Drawings (CR) $ 1,000

*Kindly note that T-accounts should be per type of revenue and expenses. We just consolidated them for illustration purposes LO2.3
 C-JE3 CLOSING ENTRY
C-JE4 CLOSING ENTRY
CLOSE REVENUE ACCOUNTS
Income Summary(DR) $ 2,906 R. Rey, Capital (DR) $ 1,000
1 TO INCOME SUMMARY

R. Rey, Capital (CR) $ 2,906 R. Rey, Drawings (CR) $ 1,000

CLOSE EXPENSE ACCOUNTS

2 TO INCOME SUMMARY

3 CLOSE INCOME SUMMARY

TO OWNER’S CAPITAL

4 CLOSE OWNER’S DRAWINGS

TO OWNER’S CAPITAL

*Kindly note that T-accounts should be per type of revenue and expenses. We just consolidated them for illustration purposes LO2.3
 CLOSING
ENTRIES
C-JE1 CLOSING ENTRY C-JE3 CLOSING ENTRY

Service Revenue (DR) $ 12,800 Income Summary(DR) $ 2,906

Income Summary(CR) $ 12,800 R. Rey, Capital (CR) $ 2,906

C-JE2 CLOSING ENTRY C-JE4 CLOSING ENTRY

Income Summary(CR) $ 9,894 R. Rey, Capital (DR) $ 1,000

$ 7,504
Supplies Expense
$ 900 R. Rey, Drawings (CR) $ 1,000
Depreciation Expense
$ 900
Insurance Expense
$ 250
Salaries & Wages Expense
$ 190
Rent Expense
$ 150
Utilities Expense
(Individual) (Individual)
Expenses Revenue

1 CLOSE REVENUE ACCOUNTS

TO INCOME SUMMARY
2 1
Income
Summary

CLOSE EXPENSE ACCOUNTS

2 TO INCOME SUMMARY

Owner’s
3 CLOSE INCOME SUMMARY
Capital TO OWNER’S CAPITAL

4
4 CLOSE OWNER’S DRAWINGS
TO OWNER’S CAPITAL
Owner’s
Drawings

LO2.3
 1 CLOSE REVENUE ACCOUNTS
TO INCOME SUMMARY
2 1

CLOSE EXPENSE ACCOUNTS

2 TO INCOME SUMMARY
$ 2,906

3
3 CLOSE INCOME SUMMARY
TO OWNER’S CAPITAL

4 CLOSE OWNER’S DRAWINGS

TO OWNER’S CAPITAL

LO2.3
 CLOSING
ENTRIES
C-JE1 CLOSING ENTRY C-JE3 CLOSING ENTRY

Service Revenue (DR) $ 12,800 Income Summary(DR) $ 2,906

Income Summary(CR) $ 12,800 R. Rey, Capital (CR) $ 2,906

C-JE2 CLOSING ENTRY C-JE4 CLOSING ENTRY

Income Summary(CR) $ 9,894 R. Rey, Capital (DR) $ 1,000

$ 7,504
Supplies Expense
$ 900 R. Rey, Drawings (CR) $ 1,000
Depreciation Expense
$ 900
Insurance Expense
$ 250
Salaries & Wages Expense
$ 190
Rent Expense
$ 150
Utilities Expense
 L04

UNDERSTANDING
POST-CLOSING
TRIAL BALANCE
W H AT I S A P O S T- C L O S I N G T R I A L B A L A N C E ?

RRCPAJ Co.
RRCPAJ
Post-Closing Co. Balance
Trial
Post-Closing Trial
August 31, Balance
2022
August 31, 2022 DEBIT CREDIT
DEBIT CREDIT
101 Cash $ 3,500
101 Accounts
112 Cash Receivable $ 3,500
7,700
112
126Accounts
Supplies Receivable 7,700
1,000
126 Supplies
130 Prepaid Insurance 1,000
3,450
130 Prepaid Insurance
149 Equipment 3,450
11,400

Post-Closing 149
150 Equipment
Accumulated Depreciation – Equipment
150 Accounts
201 Accumulated Depreciation – Equipment
Payable
11,400 $
$ 4,750
190
190

TRIAL BALANCE
201
209Accounts
UnearnedPayable
Service Revenue 4,750
400
209Salaries
212 UnearnedandService
WagesRevenue
Payable 400
1,104
212 Salaries
301 and Wages Payable
R. Rey, Capital 1,104
20,606

 to prove the equality of permanent account balances 301 R. Rey, Capital $ 27,050 $ 20,606
27,050

forwarded in the next accounting period 302 R. Rey, Drawings -

400 Service Revenue -

631 Supplies Expense -

717 Depreciation Expense -

722 Insurance Expense -

726 Salaries and Wages Expense -

729 Rent Expense -

732 Utilities Expense -

$ 27,050 $ 27,050

LO2.1 LO3.2
2 TYPES OF ACCOUNTS DURING CLOSING

TEMPORARY PERMANENT
ACCOUNTS ACCOUNTS
(nominal accounts) (real accounts)

Relate to only 1 given accounting period Relate to 2 or more future accounting periods

Close ACCOUNTS DON’T Close ACCOUNTS

LO2.2
THE ACCOUNTING CYCLE
1 Analyze the business transaction
2 Journalize the transaction
3 Post to ledger accounts
4 Prepare an unadjusted trial balance
5 Journalize and post adjusting entries
6 Prepare the adjusted trial balance

7 Prepare financial statements

8 Journalize and post closing entries

9 Prepare post-closing trial balance

THE ACCOUNTING CYCLE
1 Analyze the business transaction
2 Journalize the transaction
3 Post to ledger accounts
4 Prepare an unadjusted trial balance
5 Journalize and post adjusting entries
6 Prepare the adjusted trial balance

7 Prepare financial statements

8 Journalize and post closing entries

9 Prepare post-closing trial balance

 L05

SUMMARIZING THE
4 DIFFERENT
JOURNAL ENTRIES
ADJUSTING CLOSING REVERSING CORRECTING
ENTRIES ENTRIES ENTRIES ENTRIES
 CLOSING
ENTRIES
C-JE1 CLOSING ENTRY C-JE3 CLOSING ENTRY

Service Revenue (DR) $ 12,800 Income Summary(DR) $ 2,906

Income Summary(CR) $ 12,800 R. Rey, Capital (CR) $ 2,906

C-JE2 CLOSING ENTRY C-JE4 CLOSING ENTRY

Income Summary(CR) $ 9,894 R. Rey, Capital (DR) $ 1,000

$ 7,504
Supplies Expense
$ 900 R. Rey, Drawings (CR) $ 1,00
Depreciation Expense
$ 900
Insurance Expense
$ 250
Salaries & Wages Expense
$ 190
Rent Expense
$ 150
Utilities Expense
Unearned Revenue
Accrued Revenue

Prepaid Expenses
Accrued Expenses

Supplies Consumption

Accrued Expenses

Equipment Depreciation
ADJUSTING CLOSING REVERSING CORRECTING
ENTRIES ENTRIES ENTRIES ENTRIES
W H AT A R E R E V E R S I N G E N T R I E S ?

 They reverse previous period’s

ACCRUAL ENTRIES (ONLY)
• Don’t reverse deferrals

REVERSING
ENTRIES  They are usually made on
the first day of an accounting period
Optional at the start of the period.
Simplify recording of transactions

LO2.1 LO3.2
 ACCRUALS

ADJUSTING ENTRY REVERSING ENTRY

ASSET (DR) xx REVENUE (DR) xx

REVENUE (CR) xx ASSET (CR) xx

ADJUSTING ENTRY
ADJUSTING ENTRY
LIABILITY (DR) xx
EXPENSE (DR) xx
EXPENSE
LIABILITY (CR) xx xx
(CR)
 $ 400 ofCo.
the twoUtilities
hasbalance in the expense
unearned incurred
service
are paid $revenue
920 each foraccount
52315.
4
RRCPAJ
€ 900 of The
employees
supplies
insurance
– Bree
have
and Beau who
been
policy used
is during
for 2 years. the
a 5-day work
month.
remains
but 31not
week. August unearned
paid
falls
onatMaythe
on a Wednesday, andend
31, of the
2020,
employees aremonth.
€paid250.
on Fridays.

A-JE5
Salaries & Wages Expense (Dr) $1,104
08/31
Salaries & Wages Payable (Cr) $1,104

Compute for Consumption

Weekly Salary for 2 1,840

DAYS COVERED 5

P3.1 Daily
(Salary Expense)
368/day

3 days
Adjustment
(TOTAL SALARIES OWED) $1,104
 DON’T USE REVERSING ENTRIES USE REVERSING ENTRIES

RRCPAJ Co.
NORMAL ENTRY NORMAL ENTRY
Salaries & Wages Expense (Dr) $1,840 Aug 26 Cuono paid his 2 employees for 3rd week of August Salaries & Wages Expense (Dr) $1,840
08/26 for $920 each 08/26
Cash (CR) $1,840 Cash (CR) $1,840

ADJUSTING ENTRY ADJUSTING ENTRY

Salaries & Wages Expense (Dr) $1,104 AUG 31 is a Wednesday, and employees are paid on Fridays. RRCPAJ Co. Salaries & Wages Expense (Dr) $1,104
08/31 has 2 employees who are paid $ 920 each for 5 days 08/31
Salaries & Wages Payable (Cr) $1,104 Salaries & Wages Payable (Cr) $1,104

CLOSING ENTRY CLOSING ENTRY

May 31 (Books are closed for the period).
Income Summary (Dr) $6,624 Assume total wages expense is 6,624
Income Summary (Dr) $6,624
08/31 08/31
Salaries & Wages Expense (Cr) $6,624 Salaries & Wages Expense (Cr) $6,624

REVERSING ENTRY
No Entry. June 1 (Books are opened for the next period)
08/31
Salaries & Wages Payable (Dr)
Salaries & Wages Expense (Cr)
$1,104
$1,104

NORMAL ENTRY NORMAL ENTRY

June 2 is Friday. Rose Rey has to pay his employees
Salaries & Wages Expense (Dr) $ 736 Salaries & Wages Expense (Dr) $1,840
forthe 4th Week of Aug and the first days of September 09/02
09/02 Salaries & Wages Payable (Dr) $1,104 Cash (CR) $1,840
Cash (CR) $1,840
 ACCRUALS

ADJUSTING ENTRY REVERSING ENTRY

ASSET (DR) xx REVENUE (DR) xx

REVENUE (CR) xx ASSET (CR) xx

ADJUSTING ENTRY
ADJUSTING ENTRY
LIABILITY (DR) xx
EXPENSE (DR) xx
EXPENSE
LIABILITY (CR) xx xx
(CR)
ADJUSTING CLOSING REVERSING CORRECTING
ENTRIES ENTRIES ENTRIES ENTRIES
W H AT A R E C O R R E C T I N G E N T R I E S ?

 Create correcting entries

whenever an error is discovered

CORRECTING
ENTRIES  Affects a combination of accounts
depending on the error
Avoidable entries -correct as soon as
mistakes are found.

LO2.1 LO3.2
BE4.9
 A collection on account from a customer for $ 870 was recorded as a
1
debit to Cash $ 870 and a credit to Service Revenue $ 870

“What is“ “What Should be“ BEFORE ADJUSTMENT

ENTRY MADE CORRECT ENTRY

Cash (Dr) $870 Cash (Dr) $870 Overstated
Service Revenue (Cr) $870 Accounts Receivable (Cr) $870

Overstated
C-JE1 CORRECTING ENTRY
BE2.1
Service Revenue(DR) $870


STEP 1: Analyze Entry Made “WHAT IS”
STEP 2: Determine correct entry “WHAT SHOULD BE”
Accounts Receivable (CR) $870
 STEP 3: Analyze understatements and overstatements
 STEP 4: Create Correcting Entry
 The purchase of store supplies on account for $ 1,510 was recorded as a
2
debit to Supplies $ 1,150 and a credit to Accounts Payable $ 1,150

“What is“ “What Should be“ BEFORE ADJUSTMENT

ENTRY MADE CORRECT ENTRY Understated

$1,150
Supplies (Dr)
Accounts Payable (Cr) $1,150
Supplies (Dr)
Cash (Cr)
$1,510
$1,510
Overstated
Overstated

C-JE2.1 Reverse-Wrong C-JE2.2

BE2.1 Make-Correct
Accounts Payable (DR) $1,150 Supplies (DR) $1,510
 STEP 1: Analyze Entry Made “WHAT IS”
 STEP 2: Determine correct entry “WHAT SHOULD BE” Supplies (CR) $1,150 Cash (CR) $1,510
 STEP 3: Analyze understatements and overstatements
 STEP 4: Create Correcting Entry
 The purchase of store supplies on account for $ 1,510 was recorded as a
2
debit to Supplies $ 1,150 and a credit to Accounts Payable $ 1,150

“What is“ “What Should be“ BEFORE ADJUSTMENT

ENTRY MADE CORRECT ENTRY Understated

$1,150
Supplies (Dr)
Accounts Payable (Cr) $1,150
Supplies (Dr)
Cash (Cr)
$1,510
$1,510
Overstated
Overstated

C-JE2B
BE2.1 Compound Entry
Should be Supplies: $1,510
Accounts Payable (DR) $1,150
Supplies (DR) $ 360 Supplies Now: $1,150
 STEP 1: Analyze Entry Made “WHAT IS” _____________________
 STEP 2: Determine correct entry “WHAT SHOULD BE” Cash (CR) $1,510 ADD SUPPLIES $360
 STEP 3: Analyze understatements and overstatements
 STEP 4: Create Correcting Entry
W H AT A R E C O R R E C T I N G E N T R I E S ?

 Create correcting entries

whenever an error is discovered

CORRECTING
ENTRIES  Affects a combination of accounts
depending on the error
Avoidable entries -correct as soon as
mistakes are found.

LO2.1 LO3.2
ADJUSTING CLOSING REVERSING CORRECTING
ENTRIES ENTRIES ENTRIES ENTRIES
 L06

APPRECIATING
CLASSIFIED
BALANCE SHEET
 conceptually consistent

similar transactions
treated the same way

objective way to assess &

compare businesses

ACCOUNTING IS LIKE A
UNIVERSAL SCORECARD
FOR BUSINESSES THAT
RUN THE WORLD
- IT IS ESSENTIAL
TO HAVE A SCORECARD
MORE INFORMATION, MORE POWER
C L A S S I F I E D S TAT E M E N T O F F I N A N C I A L P O S I T I O N

 The availability of
assets to meet debts
as they fall due

 The claims of short-

and long- term
creditors on total
assets
• Basis: IAS 1 | Presentation of Financial Statements
 Improves
• Enhances usefuleness significantly
comparability
• Classifies accounts into significant group

• Optional - merely a tool to organize date

6.1
 C L A S S I F I E D S TAT E M E N T O F F I N A N C I A L P O S I T I O N

CURRENT ASSETS
•Assets that are reasonably expected to be realized as
cash or sold or consumed
• within 1 year or the business’s operating cycle

•Current assets such as Cash, Receivables, etc. are

presented in order of liquidity

NON-CURRENT ASSETS
•Assets held beyond 1 year or the business’s
operating cycle

•Property, plant and equipment, intangible assets

and long-term investments

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 C L A S S I F I E D S TAT E M E N T O F F I N A N C I A L P O S I T I O N

CURRENT LIABILITIES
1. Expected to be settled
within the normal operating cycle
2. Held for purposes of trading
3. Due to be settled within 12 months after end of
reporting period
4. The business has no right to defer settlement for
at least 12 months after the reporting period

NON-CURRENT LIABILITES
• Obligations expected to be paid
after 1 year or after an operating cycle

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C L A S S I F I E D S TAT E M E N T O F F I N A N C I A L P O S I T I O N

SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION

Owner, Capital Partner A, Capital Capital stock

Partner B, Capital Reserves
Partner C, Capital Retained Earnings

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 C L A S S I F I E D S TAT E M E N T O F F I N A N C I A L P O S I T I O N

NOTES
Equally important as they describe how some
of the numbers on the face of the statement of
financial position was calculated and often
provides additional information.

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C L A S S I F I E D S TAT E M E N T O F F I N A N C I A L P O S I T I O N

 The availability of
assets to meet debts
as they fall due

 The claims of short-

and long- term
creditors on total
assets
• Basis: IAS 1 | Presentation of Financial Statements
 Improves
• Enhances usefuleness significantly
comparability
• Classifies accounts into significant group

• Optional - merely a tool to organize date

6.1