COLLEGE OF BUSINESS AND ACCOUNTANCY

Topic: Business Transaction and their Analysis Part 3

Learning Outcomes:
• Prepare a worksheet.
• Prepare closing entries.
• Prepare a balance sheet and income statement of a service business.
• Prepare reversing entries.

Core Value/Biblical Principles:

In the preparation of financial statements, we carefully followed the steps laid down in the Accounting Cycle in
order to have an accurate and useful output. We cannot skip steps and jump into another. Each step in the
accounting cycle plays an important role in creating precise entries and managing the company’s finances each
time a purchase is made or revenue is earned. If a company decides to implement an accounting cycle, it is
important that each step is followed in the right order. Just like the story of God’s creation. If we know about
creation, and believe, we can understand our basic relationship to God, who He is and what claim He has on our
lives and how we live them. It is this understanding that gives us a sense of natural order in our lives, gives us
the knowledge of a greater purpose in our lives and gives us meaning or value to our very being.

Learning Activities and Resources:

This module completes the accounting cycle by showing how to prepare a worksheet and financial statements
thereafter. It will begin with the adjusted trial balance. In this module we’ll learn how to prepare a more
complete version of an adjusted trial balance document called the worksheet. Worksheets help by summarizing
lots of data in one place. The accounting cycle starts with the beginning asset, liability, and owner’s equity
account balances left over from the preceding period.

Introduction:
A worksheet is an analytical device used to facilitate the gathering of data for adjustments, the
preparation of financial statements, and closing entries.
Financial statements are written records that convey the business activities and the financial
performance of a company. Financial statements are often audited by government agencies, accountants, firms,
etc. to ensure accuracy and for tax, financing, or investing purposes.

Body:

PREPARING THE WORKSHEET

1. Enter the account balances in the unadjusted trial balance columns and total the amounts.
2. Enter the adjusting entries in the adjustments columns and total the amounts.
3. Compute each account's adjusted balance by combining the unadjusted trial balance and the
adjustment figures. Enter the adjusted amounts in the adjusted trial balance columns.
4. Extend the asset, liability and owner's equity amounts from the adjusted trial balance columns to the
balance sheet columns. Extend the income and expense amounts to the income statement columns.
Total the statement columns.
5. Compute profit or loss as the difference between total revenues and total expenses in the income
statement. Enter profit or loss as a balancing amount in the income statement and in the balance sheet,
and compute the final column totals
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The financial statements are the end product of the accounting process. Information from the journal
and the ledger are meaningless to most users unless they are summarized and communicated through the
financial statements.

CLOSING ENTRIES AND POST CLOSING TRIAL BALANCE

Closing entries are entries prepared at the end of the accounting period to “zero out” all nominal
accounts in the ledger. This is done so that the transactions during the period will not commingle with the
transactions in the next period.

Closing entries are prepared as follows:

1. All income accounts are debited and all expense accounts are credited. The resulting balance is
recorded in a clearing account called the “Income summary.”
2. The balance of “Income summary” is closed to the “Owner’s capital” account.
3. Any balance in the “Owner’s drawings” account is closed to the “Owner’s capital” account.

Type of accounts Equality of debits and

Columns in the worksheet
contained in the columns credits
Unadjusted Trial Balance Real, Nominal and Mixed Accounts Debit and Credits are equal
Adjusted Trial Balance Real, and Nominal Accounts Debit and Credits are equal
Income Statement Nominal Accounts only Credits > Debits: Income
Credits < Debits: Loss
Balance Sheet Real Accounts only Credits > Debits: Loss
Credits < Debits: Income
Post Closing Trial Balance Real Accounts only Debit and Credits are equal
REVERSING ENTRIES

Reversing entries are entries usually made on the first day of the next accounting period to reverse
certain adjusting entries made in the immediately preceding period.

Adjusting entries that may be reversed

1. Accruals for income or expense

2. Prepayments initially recorded using the expense method
3. Advanced collections initially recorded using the income method

ILLUSTRATION NO. 1 – Service Business

Additional information: Adjusting entries

i. Hedge Fund, Inc., a customer, has been billed for call services rendered in December 20x1 amounting
to P34,000. Hedge informed the Company that the check for the said amount is still being processed
and is expected to be deposited to the Rak N' Koll's bank account on the first week of January 20x2.
Rak N' Koll recorded the billing only in January 20x2 when the service fees were collected.
ii. Unused office supplies on December 31, 20x1 amount to P9,000.
iii. The laptop computers acquired in December have an estimated useful life of 2 years with no residual
value. The Company recognizes full-month depreciation in the month of acquisition. The annual
depreciation for the existing equipment (excluding the newly acquired laptop computers) is
P120,000. No depreciation has yet been recognized for the year.
iv. The notes payable pertains to a 12% bank loan taken on November 30, 20x1. The principal on the
loan is due after five years but monthly interests are due at the beginning of each month starting
January 1, 20x2.
v. Although no bills have yet been received; Rak N' Koll wants to accrue P7,500 for unpaid utilities used
from December 16 to 31, 20x1.

REQUIREMENTS:

a. Analyze the supporting documents and record them in the Journal in a chronological order.
b. Post the transactions in the Ledger (use T-accounts). Be sure to place the amounts in the trial balance
above as the beginning balances in your T-accounts.
c. Prepare the unadjusted trial balance columns of the December 31, 20x1 worksheet.
d. Prepare the year-end adjusting entries.
e. Complete the remaining columns of the December 31, 20x1 worksheet up to the post-closing trial
balance columns.
f. Prepare the closing entries.
g. Prepare the 20x1 statement of financial position (balance sheet) and statement of profit or loss
(income statement).
Requirement (a): Analyzing and Recording
JOURNAL
Date Account titles Debit Credit
Dec. 1 Rent expense 100,000
Cash 100,000
to record the payment for the December 20x1 rent

Dec. 2 Cash 262,000

Service fees 262,000
to record the collection of service fees

Dec. 3 Office supplies expense 20,000

Cash 20,000
to record the purchase of office supplies

Dec. 12 Cash 60,000

Service fees 60,000
to record the collection of service fees

Dec. 15 Salaries expense 45,000

Cash 45,000
to record the salaries for the payroll period Dec. 1 to Dec. 15, 20x1

Dec. 17 Computer equipment 150,000

Cash 150,000
to record the acquisition of computer equipment

Dec. 17 Utilities expense 15,000

Cash 15,000
to record the payment for utility bills for Nov. 15 to Dec. 15

Dec. 23 Cash 37,000

Service fees 37,000
to record the collection of service fees

Dec. 23 Salaries expense 75,000

Cash 75,000
to record payment for 13th month pay of employees

Dec. 28 Prepaid insurance 5,000

Cash 5,000
to record the payment for insurance covering the year 20x2

Dec. 30 Cash 350,000

Service fees 350,000
to record the collection of service fees
 Dec. 30 Salaries expense 45,000
Cash 45,000
to record the salaries for the payroll period Dec. 15 to Dec. 31, 20x1

Requirement (b): Posting in the ledger

GENERAL LEDGER

ASSETS
Cash Accounts receivable
BEG. 396,000 BEG. -
100,000 12/1
12/2 262,000 20,000 12/3
12/12 60,000 45,000 12/15 Bal. -
12/23 37,000 150,000 12/17
12/30 350,000 15,000 12/17
75,000 12/23

5,000 12/28

45,000 12/30
Bal. 650,000

Prepaid insurance Computer equipment

BEG. - BEG. 1,400,000
12/28 5,000 12/17 150,000
Bal. 5,000 Bal. 1,550,000

Accum. Depreciation
240,000 BEG.

240,000 Bal.

LIABILITIES
Loans payable
1,000,000 BEG.

1,000,000 Bal.
 EQUITY
Owner’s equity Owner’s drawings
1,254,000 BEG. 3,300,000

1,254,000 Bal. Bal. 3,300,000

INCOME EXPENSES
Service fees Salaries expense
4,946,000 BEG. BEG. 990,000
262,000 12/2 12/15 45,000
60,000 12/12 12/23 75,000
37,000 12/23 12/30 45,000
350,000 12/30 Bal. 1,155,000
5,655,000 Bal.
Rent expense
BEG. 1,100,000
12/1 100,000
Bal. 1,200,000

Utilities expense
BEG. 165,000
12/17 15,000
Bal. 180,000

Office supplies expense

BEG. 84,000
12/3 20,000
Bal. 104,000

Insurance expense
BEG. 5,000

Bal. 5,000
Requirement (c): Unadjusted trial balance

RAK N' KOLL Co.

Worksheet
December 31, 20x1
ACCOUNTS Unadjusted trial balance
Dr. Cr.
Cash 650,000
Accounts receivable -
Prepaid insurance 5,000
Computer equipment 1,550,000
Accumulated depreciation 240,000
Loans payable 1,000,000
Owner’s equity 1,254,000
Owner’s drawings 3,300,000
Service fees 5,655,000
Salaries expense 1,155,000
Rent expense 1,200,000
Utilities expense 180,000
Office supplies expense 104,000
Insurance expense 5,000
Totals 8,149,000 8,149,000

Requirement (d): Adjusting entries

JOURNAL
Date Account titles Debit Credit
Dec. 31 Accounts receivable 34,000
(i) Service fees 34,000
to accrue service fees rendered for Hedge Fund, Inc.

Dec. 31 Prepaid office supplies 9,000

(ii) Office supplies expense 9,000
to record the unused office supplies as prepaid asset

Dec. 31 Depreciation expense 126,250

(iii) Accumulated depreciation 126,250
to record the depreciation expense {[(150,000 /2) x 1/12] + 120,000}

Dec. 31 Interest expense 10,000

(iv) Interest payable 10,000
to accrue interest on the loan payable (1,000,000 x 12% x 1/12)

Dec. 31 Utilities expense 7,500

(v) Utilities payable 7,500
to accrue the cost of utilities used but not yet paid
Requirement (f): Closing entries
JOURNAL
Date Account titles Debit Credit
Dec. 31 Service fees 5,689,000
(Cl. E) Salaries expense 1,155,000
Rent expense 1,200,000
Utilities expense 187,500
Office supplies expense 95,000
Insurance expense 5,000
Depreciation expense 126,250
Interest expense 10,000
Income summary 2,910,250
to close the nominal accounts to income summary

Dec. 31 Income summary 2,910,250

(Cl. E) Owner’s equity 2,910,250
to close the income summary to owner’s equity

Dec. 31 Owner’s equity 3,300,000

(Cl. E) Owner’s drawings 3,300,000
to close the owner’s drawings to owner’s equity

Requirement (g): Balance sheet & Income statement

Rak N’ Koll Co. Rak N’ Koll Co.

Balance Sheet Income Statement
As of December 31, 20x1 For the year ended December 31, 20x1

ASSETS
INCOME
Cash ₱650,000
Accounts receivable 34,000 Service fees ₱5,689,000
Prepaid insurance 5,000
Office supplies 9,000 EXPENSES
Computer equipment 1,550,000 Salaries expense (1,155,000)
Accumulated depreciation (366,250) Rent expense (1,200,000)
TOTAL ASSETS ₱1,881,750
Utilities expense (187,500)
LIABILITIES Office supplies expense (95,000)
Notes payable ₱1,000,000 Insurance expense (5,000)
Interest payable 10,000 Depreciation expense (126,250)
Utilities payable 7,500 Interest expense (10,000)
TOTAL LIABILITIES 1,017,500
TOTAL EXPENSES (2,778,750)

EQUITY
PROFIT FOR THE
Owner's equity 864,250
PERIOD ₱2,910,250
TOTAL EQUITY 864,250

TOTAL LIABILITIES & EQUITY ₱1,881,750

ILLUSTRATION NO. 2 – Merchandising Business – Perpetual

The trial balance of George Laku, a merchandising business, on January 1, 20x1 is shown below:

George Laku
Unadjusted Trial Balance
January 01, 20x1

Accounts Debit Credit

Cash 280,000
Accounts Receivable 60,000
Inventory 140,000
Equipment 300,000
Accumulated Depreciation - Equipment 180,000
Accounts Payable 50,000
Mike Ross, Equity 550,000
TOTALS 780,000 780,000

The following were the transactions during the year:

1. Purchased inventories worth P600,000, on account. George uses the perpetual inventory system.
2. Sold inventories costing P560,000 for P1,600,000, on account.
3. Collected P1,490,000 accounts receivable.
4. Paid P490,000 accounts payable.
5. Paid salaries expense of P820,000.
6. Paid utilities expense of P64,000.

Additional information for year-end adjustments:

• The annual depreciation on the equipment is P30,000.

• Accounts amounting to P3,000 are doubtful of collection.

REQUIREMENTS:

a. Provide the journal entries.

b. Post the entries to the ledger.
c. Prepare the unadjusted trial balance.
d. Provide the adjusting entries.
e. Complete the worksheet up to post-closing trial balance.
f. Prepare the closing entries.
g. Prepare the balance sheet and income statement.

Requirement (a): Journal entries

(1) Inventory 600,000
Accounts payable 600,000
(2) Accounts receivable 1,600,000
Sales 1,600,000

Cost of goods sold 560,000

Inventory 560,000
(3) Cash 1,490,000
Accounts receivable 1,490,000
 (4) Accounts payable 490,000
Cash 490,000
(5) Salaries expense 820,000
Cash 820,000
(6) Utilities expense 64,000
Cash 64,000

Requirement (b): Posting

ASSETS
Cash Accounts receivable
beg. 280,000 beg. 60,000
(3) 1,490,000 490,000 (4) (2) 1,600,000 1,490,000 (3)
820,000 (5)
64,000 (6)
Bal. 396,000 Bal. 170,000

Inventory
beg. 140,000
(1) 600,000 560,000 (2)
Bal. 180,000

Equipment Accum. Dep’n.

beg. 300,000 180,000 beg.
Bal. 300,000 180,000 Bal.

LIABILITIES
Accounts payable
50,000 beg.
(4) 490,000 600,000 (1)
160,000 Bal.

EQUITY
Owner’s equity
550,000 beg.
550,000 Bal.

INCOME EXPENSES
Sales Salaries expense
1,600,000 (2) (5) 820,000
1,600,000 Bal. Bal. 820,000

Cost of goods sold Utilities expense

(2) 560,000 (6) 64,000
Bal. 560,000 Bal. 64,000
Requirement (c): Unadjusted trial balance

George Laku
Unadjusted Trial Balance
December 31, 20x1

Accounts Debits Credits

Cash ₱396,000
Accounts receivable 170,000
Inventory 180,000
Equipment 300,000
Accum. Depreciation ₱180,000
Accounts payable 160,000
Owner’s equity 550,000
Sales 1,600,000
Cost of goods sold 560,000
Salaries expense 820,000
Utilities expense 64,000
Totals ₱2,490,000 ₱2,490,000

Requirement (d): Adjusting entries

AJE #1: Depreciation expense

Depreciation expense 30,000
Accumulated depreciation 30,000

AJE #2: Bad debts expense

Bad debts expense 3,000
Allowance for bad debts 3,000

Requirement (e): Worksheet

Requirement (f): Closing entries
CLE #1
Sales 1,600,000
Cost of goods sold 560,000
Salaries expense 820,000
Utilities expense 64,000
Depreciation expense 30,000
Bad debts expense 3,000
Income summary 123,000

CLE #2
Income summary 123,000
Owner’s capital 123,000

Requirement (g): Balance sheet and Income statement

George Laku
Balance Sheet
As of December 31, 20x1

ASSETS
Cash ₱396,000
Accounts receivable 170,000
George Laku
Allowance for bad debts (3,000)
Income Statement
Inventory 180,000
Equipment 300,000 For the year ended December 31, 20x1
Accumulated depreciation (210,000)
TOTAL ASSETS ₱833,000
Sales ₱1,600,000
LIABILITIES
Cost of goods sold (560,000)
Accounts payable ₱160,000
GROSS PROFIT 1,040,000
TOTAL LIABILITIES 160,000
Salaries expense (820,000)
EQUITY Utilities expense (64,000)
Owner's equity 673,000 Depreciation expense (30,000)
TOTAL EQUITY 673,000
Bad debts expense (3,000)
TOTAL LIABILITIES & EQUITY ₱833,000 PROFIT FOR THE PERIOD ₱123,000

Life Application:
In the retail trade, merchants often issue credit cards. Why? Because they induce people to spend, and interest
charges that may be assessed can themselves provide a generous source of additional revenue. However, these
company-issued cards introduce added costs: customers that don’t pay (known as bad debts), maintenance of
a credit department, periodic billings, and so forth.
To avoid these issues, many merchants accept other forms of credit cards like Visa and MasterCard. When a
merchant accepts these cards, they are usually paid instantly by the credit card company (net of a service
charge that is negotiated in the general range of 1% to 3% of the sale). The subsequent billing and collection is
handled by the credit card company. Many merchants will record the full amount of the sale as revenue, and
then recognize an offsetting expense for the amount charged by the credit card companies.
Summary:
• A worksheet is an analytical device used to facilitate the gathering of data for adjustments, the
preparation of financial statements, and closing entries.
• The financial statements are the means by which information accumulated and processed in
financial accounting is periodically communicated to the users. The financial statements are the end
products of the accounting process. The balance sheet shows the assets, liabilities and equity of a
business.
• The income statement shows the income and expenses, and consequently, the profit or loss, of a
business.
• Closing entries are entries prepared at the end of the accounting period to "zero out" all nominal
accounts in the ledger.
• The post-closing trial balance is prepared to check the equality of debits and credits in the general
ledger after closing entries are made. The post-closing trial balance contains only real accounts.
These accounts and their balances appear on the balance sheet.
• Reversing entries are entries usually made on the first day of the next accounting period to reverse
certain adjusting entries in the immediately preceding period.
• Only the adjusting entries made for the following may be reversed: (1) Accruals for income or
expense; (2) Prepayments recorded using the expense method; (3) Advance collections are recorded
using the income method.
• Inventories are assets that are held for sale in the ordinary course of business activities.
• The two inventory systems are: (1) Perpetual system and (2) Periodic system.
• Under the periodic system, COGS is computed as follows:
Beginning inventory XX
Add: Net purchases xx
Total goods available for sale xx
Less: Ending inventory (xx)
Cost of goods sold xx
• Gross profit = Net sales minus Cost of goods sold

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References:
Financial Accounting and Reporting (fundamentals) [by: Millan, Zeus Vernon B. (2021)]
Basic Financial Accounting and Reporting: Domdane Publishers and Made Easy [Ballada, Win. (2019)]