BM1705

Completing the Accounting Cycle

The Worksheet
Worksheet is a document with several columns often used by accountants in summarizing the data for financial
statements. This is not a journal, a ledger, or a financial statement. It is simply a summary device that identifies
accounts that need adjustments. Remember that the worksheet is an internal document. It should not be given
to outsiders.

The heading of the worksheet must display the following information:

• Name of the business (Mac Co.)
• Title of the document (Worksheet)
• Period covered by the worksheet (December 31, 2018)

Steps in preparing the Worksheet:

1. Enter the account titles and their unadjusted balances in the Trial Balance columns of the worksheet, and
total the amounts. The data for the first two (2) columns came from the ledger accounts before any
adjustments. Accounts are listed in proper order (Cash first, Accounts receivable second, and so on). Total
debits must equal total credits.

MAC CO.
Worksheet
December 31, 2018
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 402,500
Accounts Receivable 70,000
Supplies 80,000
Equipment 350,000
Accounts Payable 80,000
Mac, Capital 750,000
Mac, Drawing 65,000
Service Revenue 235,000
Advertising Expense 12,500
Rent Expense 30,000
Salaries Expense 45,000
Utilities Expense 10,000
Utilities Payable
Supplies Expense
Depr’n. Expense – Equip.
Accum. Depr’n. – Equip.
Total 1,065,000 1,065,000

2. Enter the adjusting entries in the Adjustments columns, and total the amounts.

MAC CO.
Worksheet
December 31, 2018
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 402,500
Accounts Receivable 70,000 30,000
Supplies 80,000 9,000
Equipment 350,000
Accounts Payable 80,000
Mac, Capital 750,000
Mac, Drawing 65,000
Service Revenue 235,000 30,000
Advertising Expense 12,500
Rent Expense 30,000
Salaries Expense 45,000
Utilities Expense 10,000 18,000
Utilities Payable 18,000
Supplies Expense 9,000
Depr’n. Expense – Equip. 7,200
Accum. Depr’n. – Equip. 7,200
Total 1,065,000 1,065,000 64,200 64,200

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3. Compute each account’s adjusted balance by combining the trial balance and adjustment figures. Enter
each account’s adjusted amount in the Adjusted Trial Balance columns.

MAC CO.
Worksheet
December 31, 2018
Adjusted Trial
Trial Balance Adjustments Income Statement Balance Sheet
Balance
Account Title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 402,500 402,500
Accounts Receivable 70,000 30,000 100,000
Supplies 80,000 9,000 71,000
Equipment 350,000 350,000
Accounts Payable 80,000 80,000
Mac, Capital 750,000 750,000
Mac, Drawing 65,000 65,000
Service Revenue 235,000 30,000 265,000
Advertising Expense 12,500 12,500
Rent Expense 30,000 30,000
Salaries Expense 45,000 45,000
Utilities Expense 10,000 18,000 28,000

Utilities Payable 18,000 18,000

Supplies Expense 9,000 9,000
Depr’n. Expense – Equip. 7,200 7,200
Accum. Depr’n. – Equip. 7,200 7,200
Total 1,065,000 1,065,000 64,200 64,200 1,120,200 1,120,200

4. All nominal accounts (revenue and expenses) are copied from the Adjusted Trial Balance to the Income
Statement columns, while all real accounts are copied to the Balance Sheet columns.

MAC CO.
Worksheet
December 31, 2018

Adjusted Trial
Trial Balance Adjustments Income Statement Balance Sheet
Balance
Account Title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 402,500 402,500 402,500
Accounts Receivable 70,000 30,000 100,000 70,000
Supplies 80,000 9,000 71,000 71,000
Equipment 350,000 350,000 350,000
Accounts Payable 80,000 80,000 80,000
Mac, Capital 750,000 750,000 750,000
Mac, Drawing 65,000 65,000 65,000
Service Revenue 235,000 30,000 265,000 265,000
Advertising Expense 12,500 12,500 12,500
Rent Expense 30,000 30,000 30,000
Salaries Expense 45,000 45,000 45,000
Utilities Expense 10,000 18,000 28,000 28,000

Utilities Payable 18,000 18,000 18,000

Supplies Expense 9,000 9,000 9,000
Depr’n. Expense – Equip. 7,200 7,200 7,200
Accum. Depr’n. – Equip. 7,200 7,200 7,200
Total 1,065,000 1,065,000 64,200 64,200 1,120,200 1,120,200 131,700 265,000 988,500 855,200
Net Income 133,300 133,300
265,000 265,000 988,500 988,500

On the income statement, compute net income or net loss as total revenues minus total expenses. Enter
net income (loss) as the balancing amount on the income statement. Also, enter net income (loss) as the
balancing amount on the balance sheet. For the given example, total expenses are P131,700 deducted
from total revenues of P265,000 that will result to a difference of P133,300 which will be a net income
because total credits (revenues) exceed total debits (expenses).

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Preparing Financial Statements from a Worksheet

The worksheet is useful for accountants in making the adjusting entries, preparing the financial statements, and
closing the accounts. The worksheet shows the amount of net income or loss for the period, but it is an internal
document while an income statement is for external users. As discussed from the previous weeks, same
concepts are used in preparing the income statement and the balance sheet.

MAC CO.
Income Statement
For the month ended December 31, 2018
Revenue:
Service Revenue P 265,000
Expenses:
Advertising Expense P 12,500
Rent Expense 30,000
Salaries Expense 45,000
Utilities Expense 28,000
Supplies Expense 9,000
Depreciation Expense – Equipment 7,200 131,700
Net Income P 133,300

MAC CO.
Balance Sheet
December 31, 2018
Assets
Cash P 402,500
Accounts Receivable 100,000
Supplies 71,000
Equipment 350,000
Accumulated Depreciation – Equipment (7,200) 342,800
Total Assets P 916,300

Liabilities and Owner’s Equity

Accounts Payable 80,000
Utilities Payable 18,000
Total Liabilities 98,000

Mac, Capital 750,000

Mac, Drawing 65,000
Net Income 133,300
Total Owner’s Equity 818,300
Total Liabilities and Owner’s Equity P 916,300

Closing the Accounts

Closing the accounts occurs at the end of the period. Closing consists of journalizing and posting the closing
entries in order to get the accounts ready for the next period. The closing process zeroes out all the revenues
and all the expenses in order to measure each period’s net income separately from all other periods. It also
updates the Capital account balance. The last step in the closing process zeroes out drawing (Horngren,
Harrison Jr., & Oliver, 2012).
Recall that the income statement reports net income for a specific period. For example, the business’ net income
for 2018 relates exclusively to 2018. At December 31, 2018, Mac Co. closes its revenue and expense accounts
for the year. For this reason, revenues and expenses are called temporary accounts (nominal accounts). For
example, Mac Co.’s balance of Service Revenue at December 31, 2018, is P265,000. This balance relates
exclusively to December and must be zeroed out before Mac Co. records revenue for the next accounting

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period. Similarly, the various expense account balances are for December only and must also be zeroed out at
the end of the accounting.

The “Mac, Drawing” account is also temporary and must be closed at the end of the period because it measures
the owner’s drawing for that one period only. All temporary accounts (drawing, revenues, and expenses) are
closed or zeroed out.

By contrast, the permanent accounts (real accounts) -- the assets, liabilities, and capital -- are not closed at
the end of the period. Another way to remember which accounts are permanent is to recall that all accounts on
the balance sheet are permanent accounts because they are part of the accounting equation.

Closing entries transfer the revenue, expense, and drawing balances to the Capital account to ready the
company’s books for the next period.

As an intermediate step, the revenues and the expenses may be transferred first to an account titled “Income
summary”. This account summarizes the net income (or net loss) for the period by collecting the sum of all the
expenses (a debit) and the sum of all the revenues (a credit). The Income summary account is like a temporary
“holding tank” that shows the amount of net income or net loss of the current period. Its balance (net income or
net loss) is then transferred (closed) to the Capital account (the final account in the closing process) (Horngren,
Harrison Jr., & Oliver, 2012).

The following are the four (4) steps in closing the books (Rante, 2013):
1. Debit each revenue account for the amount of its credit balance, then credit Income Summary or Profit
and Loss Summary account for the total.

Particulars PR Debit Credit

Dec. 31 Service Revenue 265,000
Income Summary 265,000
To close revenue account.

2. Credit each expense account for the amount of its debit balance and credit Income Summary or Profit
and Loss Summary account for the total.

Particulars PR Debit Credit

Dec. 31 Income Summary 131,700
Advertising Expense 12,500
Rent Expense 30,000
Salaries Expense 45,000
Utilities Expense 28,000
Supplies Expense 9,000
Depreciation Expense – Equipment 7,200
To close expense accounts.

3. The Income Summary account summarizes the revenues and expenses for the period. If total credits
are greater than the total debits, it indicates income from operation and vice versa. Finally, the balance
is closed to Capital account.

Particulars PR Debit Credit

Dec. 31 Income Summary 133,300
Mac, Capital 133,300
To close income summary account to capital.

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4. The drawing account is also closed to capital account. Normally, drawing account has a debit balance
to close it, debit capital account, and credit drawing.

Particulars PR Debit Credit

Dec. 31 Mac, Capital 65,000
Mac, Drawing 65,000
To close drawing account to capital.

Expenses Income Summary Service Revenue Mac, Drawing Mac, Capital

12,500 12,500 12,500 265,000 265,000 265,000 65,000 65,000 65,000 750,000
30,000 30,000 30,000 0 0 133,300
45,000 45,000 45,000 65,000 883,300
28,000 28,000 28,000 818,300
9,000 9,000 9,000
7,200 7,200 7,200
0 131,700 265,000
133,300

Post-Closing Trial Balance

The accounting cycle can end with a post-closing trial balance. This optional step lists the accounts and their
adjusted balances after closing.

MAC CO.
Post-Closing Trial Balance
December 31, 2018
Balance
Particulars PR Debit Credit
Cash P 402,500
Accounts Receivable 100,000
Supplies 71,000
Equipment 350,000
Accumulated Depreciation – Equipment P 7,200
Accounts Payable 80,000
Utilities Payable 18,000
Mac, Capital 818,300
TOTAL P 923,500 P 923,500

Only assets, liabilities, and capital accounts appear on the post-closing trial balance. No temporary accounts
(revenues, expenses, or drawing) are included because they have been closed (their balances are zero). The
ledger is now up-to-date and ready for the next period (Horngren, Harrison Jr., & Oliver, 2012).

Reversing Entries
Reversing entries are no longer part of the accounting cycle because these are prepared at the beginning of
the next accounting period. The objective of these entries is to reverse the adjusting entry made on accruals of
revenue and expenses. The following is a summary of guidelines for reversing entries:
1. Reverse adjusting entries made on accrual of revenue and expenses.
2. Prepayments, if the initial entry to record the transaction is debited to an expense account.
3. Advance payments made by customers, if the initial entry to record the transaction is credited to revenue
account.
4. Provision for uncollectible accounts and depreciation are not reversed.

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Illustration: The following data for adjustments at December 31, 2018 are available from the records of ABC
Advertising Company:
1. The Insurance Expense account has a debit of P21,120, representing the cost of 2-year fire insurance policy
dated October 1 of the current year.
2. Advertising Revenue was credited for P27,000 received from Alta Company on December 1, representing
3-month rental of a van where their new products are displayed.
3. The advertising materials purchased during the last quarter of the year in the amount of P4,800 were
recorded debiting Advertising Supplies Expense. Physical count of materials at year end revealed that
P1,200 of materials are on hand.
4. Salaries and wages for the last week of December amounting to P5,600 was accrued.
5. The service vehicle of ABC Advertising Company costing P650,000 has an estimated salvage value of
P50,000 after its 5-year economic life.
Adjusting Entries:
Particulars PR Debit Credit
1 Dec. 31 Prepaid Insurance 18,480
Insurance Expense (21,120 x 21/24) 18,480

2 31 Advertising Revenue 18,000

Unearned Advertising Revenue (27,000 x 2/3) 18,000

3 31 Advertising Supplies on Hand 1,200

Advertising Supplies Expense 1,200

4 31 Salaries and Wages 5,600

Salaries and Wages Payable 5,600

5 31 Depreciation Expense 120,000

Accumulated Depreciation (650,000-50,000/5 years) 120,000

Reversing Entries:
Particulars PR Debit Credit
Jan. 01 Salaries and Wages Payable 5,600
Salaries and Wages 5,600
Reverse accrual of expenses.

Insurance Expense 18,480

Prepaid Insurance 18,480
Reverse adjusting entry on insurance.

Unearned Advertising Revenue 18,000

Advertising Revenue 18,000
Reverse adjusting entry on advertising revenue.

Advertising Supplies Expense 1,200

Advertising Supplies on Hand 1,200
Reverse adjusting entry on supplies.

Adjusting entry on depreciation is not revered.

References:
Horngren, C. T., Harrison Jr., W. T., & Oliver, M. (2012). Accounting (9th ed.). Upper Saddle River, New Jersey: Prentice Hall.
Needles, B. E., Powers, M., & Crosson, S. V. (2014). Principles of accounting. United States of America: Cengage Learning.
Rante, G. A. (2013). Fundamentals of accounting (Accounting for service, merchandising, and manufacturing entities). Mandaluyong:
Millenium Books, Inc.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Accounting principles (12th ed.). United States of America: John Wiley & Sons, Inc.

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