ACCT 1A&B BCSV

COMPLETING THE ACCOUNTING CYCLE

~LECTURE~

Adjusted trial balance is prepared

 After journalizing and posting the adjusting entries, adjusted trial balance can be
prepared. The amounts here are all adjusted and updated. A worksheet is
necessary to complete this step.
 10-column worksheet.

Account: Unadjusted trial Adjustments: Adjusted trial Income Balance

balance: balance: Statement: Sheet:
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
xx xx xx xx xx xx xx xx xx xx

Financial statements are prepared

 After the completion of the worksheet, the financial statements are prepared, in
the following order:
1. Statement of comprehensive income
2. Statement of changes in equity
3. Statement of Financial Position
4. Statement of Cash flows

Financial statements – the means by which the information accumulated and processed in
financial accounting is communicated to the users.
- The end product or main output of the financial accounting process.
- Shows the results of the management’s stewardship of the resources entrusted to it.
- Shall be presented at least annually.
Accounts receivable – open accounts or those not supported by promissory notes.
Notes receivable – those supported by formal promises to pay in the form of notes.

Statement of comprehensive income

Comprehensive income – the change in equity during a period resulting from transactions
and other events, other than changes resulting from transactions with owners in their capacity
as owners.
- Two (2) parts: (1) income statement (Profit or loss) (2) Other comprehensive income.

Profit or loss – the total income less expenses.

Income statement – a formal statement showing the financial performance of an entity
for a given period of time.
- Financial performance of an entity is primarily measured in terms of the level of income
earned by the entity through the effective and efficient utilization of its resources.

Statement of Financial Position

Statement of financial position – a formal statement of the assets, liabilities, and owner’s
equity of the business as of a given date.

Page 1 of 6
ACCT 1A&B BCSV

- Investors, creditors, and other statement users analyze the statement of financial
position to evaluate liquidity, solvency, and the need of the entity for additional
financing.
- Traditionally called the Balance sheet.

Formats:
1. Report form – lists the assets, followed by liabilities and the owner’s equity in a
downward sequence. (vertical)
2. Account form - lists the assets on the left side while the liabilities and owner’s equity on
the right side, similar to an account in the ledger.

Current or Non-current classification:

 An entity shall present current and non-current assets, and current and non-
current liabilities, as separate classifications on the face of the statement of
financial position.

Current assets:
An entity shall be classified as current when it satisfies any of the following criteria:
 It is expected to be realized in, or is intended for sale or consumption in, the entity’s
normal operating cycle.
 It is held primarily for the purpose of being traded.
 It is expected to be realized within 12 months after reporting period.
 It is cash or cash equivalent unless it is restricted from being used to settle a liability for
at least 12 months after the reporting date.
Other than those mentioned above, all other assets shall be classified as non-current.

Current liabilities:
A liability shall be classified as current when it satisfies any of the following criteria:
 It is expected to be settled in the entity’s normal operating cycle.
 It is held primarily for the purpose of being traded.
 It is due to be settled within 12 months after the reporting date.
 The entity does not have an unconditional right to defer settlement of the liability for at
least 12 months after the reporting date.
Other than those mentioned above, all other liabilities shall be classified as non-current.
Working capital - the capital of a business that is used in its day-to-day trading operations
- Computed as the difference of current assets and current liabilities.

Statement of Cash flows

Statement of cash flows
- The basic financial statement prepared and used in analyzing cash flows.
- It reports the cash receipts, disbursements, and net changes resulting from operating,
investing, and financing activities of the firm during a specific period.

CLASSIFICATION OF CASH FLOWS:

1. Operating activities – cash effects of transactions that create revenues and
expenses.
- Generally relate to changes in working capital [Current Assets and Current Liabilities].
Cash inflows: [1] sale of goods/services [2] interest revenue [3] dividend revenue

Page 2 of 6
ACCT 1A&B BCSV

Cash outflows: [1] salaries, wages paid to employees [2] payment to suppliers [3]
interest expense

2. Investing activities – generally relate to changes in non-current assets.

Cash inflows: [1] Sale of fixed assets [2] collection of principal on loans
Cash outflows: [1] purchase of fixed assets [2] lending of money

3. Financing activities – relate to changes in long-term obligations and equity

accounts.
Cash inflows: [1] additional investments made by the owner. [2] issuance of notes or
bonds
Cash outflows: [1] withdrawals made by the owner [2] redemption of long-term debts

Ways presenting cash flows from operating activities:

1. Direct method – major classes of gross cash receipts and gross cash payments are
disclosed.
o Entities are encouraged to report cash flows from operating activities using this
method.
o Provides information which may be useful in estimating future cash flows and
which is not available under the indirect method.

2. Indirect method – net income or loss is adjusted for the effects of non-cash
transactions.

Closing entries
 Journal entries that bring temporary accounts to zero balance and transfer their
balances to the permanent capital account at the end of the accounting period.

Query: Why is there a need to close temporary or nominal accounts?

Answer To prevent the mixing of revenues, expenses, and withdrawal accounts of one
: period to the next accounting period.

 Temporary accounts include all Statement of Comprehensive Income accounts and

withdrawal account. They are known as nominal accounts.
 Permanent accounts carry forward their ending balances to the next accounting period.
They are known as real accounts. They comprise items in the Statement of Financial
Position.

Income summary account – used as another temporary account in which the revenue and
the expense accounts are closed to determine whether the business operations results to
income or loss. Also known as Revenue and Expense Summary.
 There is net income if the resulting balance of the Income summary account (after
closing revenues and expenses) is credit balance (Revenues > Expenses) otherwise,
there is net loss.

Procedures in closing the nominal accounts:

1. Close all revenue accounts by debiting the amount and crediting income summary
account.

Page 3 of 6
ACCT 1A&B BCSV

2. Close all expense accounts by crediting the amount and debiting income summary
account.
3. Close the balance of the income summary account to the capital account, which balance
represents profit (credit balance) or loss (debit balance) for the period.
4. Close the drawing account to the capital account.

Post-closing trial balance is prepared

 The purpose is to check the equality of debits and credits in the ledger after the
adjusting and closing entries are recorded and posted.
 At this point, the only accounts with balances are assets, contra accounts,
liabilities, and capital.

Reversing entries
- Optional because it does not change the amount reported in the financial statements.
- Journal entries made at the beginning of the next accounting period and are exactly the
reverse of some adjusting entries.
- They are made after the preparation of FS and closing the books of accounts, but before
the recording of the regular transactions for the next accounting period.
- Purpose: Not to correct the AJE but to simplify the recording of recurring transactions of
the next accounting period.
- Also for consistency in the recording of income and expenses.

Rules in reversing journal entries

 General rule: a reversing entry is made if an adjustment previously entered increases
the SFP account totals.

Reversing entries are prepared for:

1. Accrued expenses
2. Accrued income
3. Prepayments under expense method
4. Deferred income under income method
The rest will not need any reversing entry.

Page 4 of 6
ACCT 1A&B BCSV

~APPLICATION~

LM217 Repair Shop

Trial Balance
December 31, 2015

Debit: Credit:
Cash P 81,180
Accounts receivable 25,650
Prepaid insurance 3,600
Shop supplies 16,400
Equipment 84,000
Accumulated Depreciation 8,400
Accounts Payable 32,640
Bank Loan Payable 50,000
LadiesMan217, Capital 77,000
LadiesMan217, Drawing 36,000
Service Income 191,940
Salary Expense 64,500
Rent Expense 28,000
Utilities Expense 13,150
Miscellaneous Expense 7,500
P 359,980 P 359,980

Shown above is the trial balance of LM217 Repair Shop for the current year. LM217 Repair Shop
is on its second year of operations. LadiesMan217 Capital at the beginning of the current year
was P 57,000. Below are the data needed for adjustments:

1. The 2-year P 3,600 insurance was paid on January 1, 2015.

2. Shop rental of P 6,000 for three months starting December 1 was debited to rent
expense.
3. Interest of 18% per annum on one-year bank loan granted on July 1, has accrued.
4. Advertising placement of P 1,800 for three months effective October 1 was still unpaid.
5. P 7,500 was collected in advance on December 30 for repair services to be rendered
next year.
6. Shop supplies inventory at the end of December amounted to P 6,860.
7. Equipment has an estimated useful life of ten years.

Required:
a. Prepare the adjusting entries.
b. Prepare a 10-column worksheet for the year ended December 31, 2015.
c. Prepare a statement of Comprehensive Income for the year ended December 31, 2015.
d. Prepare a statement of Changes in Equity for the year ended December 31, 2015.
e. Prepare a statement of Financial Position as of December 31, 2015.
f. Prepare the closing entries.
g. Prepare the post-closing trial balance.
h. Prepare the reversing entries.

Page 5 of 6
ACCT 1A&B BCSV

Comprehensive
Joey opened Super Lines Washing Co. on October 1, 2015. During October, the following
transactions were completed:

Oct 1 Invested P 80,000 cash in the business.

.
Purchased used delivery van for P 60,000 terms: 50% down and the balance on
account.
3 Purchased cleaning supplies for P 9,000 on account.
5 Paid P 12,000 cash on one-year insurance policy. The bookkeeper charged an
asset account for this transaction.
1 Billed customers P 25,000 for washing services.
2
1 Paid P 10,000 cash owed on delivery van and P 5,000 owed on cleaning supplies.
8
2 Paid P 12,000 cash for employee salaries.
0
2 Collected cash from customers billed on October 12.
1
2 Billed customers P 30,000 for cleaning services.
5
3 Paid P 2,000 for a month’s expense on gas and oil of delivery van.
1
Withdrew P 6,000 cash for personal use.

Requirements:
a. Journalize and post the October transactions.
b. Prepare the unadjusted trial balance for October 31, 2015.
c. Journalize the following adjustments on the worksheet and complete the working
papers:
(1) The estimated life of the delivery van is 10 years without salvage value.
(2) The insurance policy is effective October 1, 2015.
(3) The unused cleaning supplies at October 31, 2015 amount to P 5,000.
(4) Salaries incurred but not yet paid as of October 31, 2015 amounted to P 6,000.
d. Prepare the following for October 31:
(1) Statement of comprehensive income
(2) Statement of changes in equity
(3) Statement of financial position
e. Journalize and post the closing entries
f. Prepare the post-closing trial balance
g. Prepare the reversing entries

Page 6 of 6