Ateneo de Zamboanga University

ACCOUNTANCY ACADEMIC ORGANIZATION

A School of Management and Accountancy Student Government

COMPLETING THE ACCOUNTING CYCLE

I. Using a Worksheet
A worksheet is a multiple-column form used in the adjustment process and in preparing financial
statements. It is a working tool, not a permanent accounting record. It is neither a journal nor a part of
the general ledger. The use of it is OPTIONAL.
The use of a worksheet is (1) to minimize errors in the records, (2) to simplify the end-of-period
procedures, and (3) to provide the financial statements to interested parties at an earlier date.

*Steps in preparing a worksheet*

1. Prepare a Trial Balance on the Worksheet
2. Enter the adjustments in the Adjustments Columns
3. Enter the adjusted balances in the adjusted trial balance columns
4. Extend the adjusted trial balance amounts to appropriate financial statement columns
5. Total the statement columns, compute the net income (or net loss), and complete the worksheet

II. Continuation of the Accounting Cycle

1. Closing Entries
 After having adjusted the accounts at the end of the accounting period, the company makes
the accounts ready for the next period. This is called “closing the books”. Only temporary
accounts are closed at the end of the accounting period. Permanent accounts are not closed
from period to period rather, the balances of these accounts are carried forward into the next
accounting period.

TEMPORARY / NOMINAL ACCOUNT PERMANENT / REAL ACCOUNT

All Revenue Accounts All Asset Accounts
All Expense Accounts All Liability Accounts
Owner’s Drawing Owner’s Capital Account
Income Statement / Drawings Accounts Balance Sheet Accounts

 Through closing entries, one transfers all temporary accounts to owner’s capital, a
permanent owner’s equity accounts. Therefore, at the end of an accounting period, all
temporary accounts must have zero balances.
 Closing entries are usually done at the end of an ANNUAL accounting period.

a. Journalizing and Posting Closing Entries

1. Debit each revenue account for its balance, and credit Income Summary for total
revenues.
2. Debit Income Summary for total expenses, and credit each expense account for its
balance.
3. Debit Income Summary and credit Owner’s Capital for the amount of net income OR
debit Owner’s Capital and credit Income Summary for the amount of net loss.
4. Debit owner’s capital for the balance in the owner’s drawings account and credit owner’s
drawings for the same amount.

*Income Summary is a temporary account where all revenue and expense accounts are closed to.

b. Cautions in preparing closing entries

 Avoid unintentionally doubling the revenue and expense balances rather than zeroing
them
 Do not close Owner’s Drawings through Income Summary account. Owner’s Drawings is
not an expense, and it is not a factor in determining net income.

2. Post-Closing Trial Balance

 After all closing entries have been journalized and posted, a post-closing trial balance is
prepared. The purpose of this trial balance is to prove the equality of the permanent

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

(statement of financial position) account balances that are carried forward into the next
accounting period.

III. Summary of the Accounting Cycle

Accounting Cycle Steps

1. Analyze business transactions

2. Journalize the transactions
3. Post to ledger accounts
4. Prepare a trial balance
5. Journalize and post adjusting entries: deferrals/accruals
6. Prepare an adjusted trial balance
7. Prepare financial statements: (1) Statement of Comprehensive Income; (2) Statement
of Changes in Owner’s Equity; (3) Statement of Financial Position
8. Journalize and post closing entries
9. Prepare a post-closing trial balance then back to step 1
**Steps 1-3 : may occur daily during the accounting period
4-7 : may occur on a periodic basis (monthly, quarterly,etc)
8-9 : takes place at the end of a company’s annual accounting period

Appendix A

I. Reversing Entries (Optional Step) – exact opposite of the adjusting entry made in the previous period.
These are made at the beginning of the next accounting period. The purpose of these is to simplify the
recording of a subsequent transaction related to an adjusting entry.

Ex.
1. Oct 26 (initial salary entry): QueHorror Agency pays $4000 of salaries and wages earned between
Oct 15 and Oct 26
2. Oct 31 (adjusting entry): Salaries and wages earned between Oct 29 and Oct 31 are $1200. The
agency will pay these in the Nov 9 payroll.
3. Nov 9 (subsequent salary entry): Salaries and wages paid are $4000. Of this amount, $1200
applied to accrued salaries and wages payable and $2800 was earned between Nov 1 and Nov 9.

Without Reversing Entries With Reversing Entry

Initial Salary Entry Initial Salary Entry

Oct 26 Salaries and Wages Expense $4000 Oct 26 Salaries and Wages Expense $4000
Cash $4000 Cash $4000

Adjusting Entry Adjusting Entry

Oct 31 Salaries and Wages Expense 1200 Oct 31 Salaries and Wages Expense 1200
Salaries and Wages Payable 1200 Salaries and Wages Payable 1200

Closing Entry Closing Entry

Oct 31 Income Summary 5200 Oct 31 Income Summary 5200
Salaries and Wages Expense 5200 Salaries and Wages Expense 5200

No Reversing Entry Reversing Entry

Nov 1 Salaries and Wages Payable 1200
Salaries and Wages Expense 1200

Subsequent Salary Entry Subsequent Salary Entry

Nov 9 Salaries and Wages Payable 1200 Nov 9 Salaries and Wages Expense 4000
Salaries and Wages Expense 2800 Cash 4000
Cash 4000

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

II. Correcting Entries (Avoidable Step) – entries that correct errors in previous entries. These must be
posted before closing entries.

Adjusting Entries Correcting Entries

1. Integral part of the accounting cycle 1. Unnecessary if the records are error-free

2. Journalized and posted only at the end of an 2. Made whenever an error is discovered
accounting period
3. May involve any combination of accounts
3. Always affect at least one statement of in need of correction
financial position account and one statement
of comprehensive income account

Case 1
Incorrect Entry (May 01) Correct Entry (May 01)
Cash xx Cash xx
Service Revenue xx Accounts Receivable xx

Correcting Entry

May 05 Service Revenue xx

Accounts Receivable xx
To record correcting
entry of May 01

Case 2
Incorrect Entry (May 03) Correct Entry (May 03)
Equipment 45 Equipment 450
Accounts Payable 45 Accounts Payable 450

Correcting Entry

May 07 Equipment 405

Accounts Payable 405
To record correcting
entry of May 03

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