Module 8B

WORKSHEET, WORKING PAPER, or SPREADSHEET...
 these are synonymous terms that include any columnar and systematic presentation of
accounting data
 a useful tool in organizing and computing for wide range of information or values
 a place where adjusting entries can be prepared informally, making it relatively easy to
change certain estimated amounts before they are recorded in the books of accounts
and posted in the ledger
 allows data-users to get a preview of needed figures without the necessity of preparing
formal reports and/or schedules
 facilitates the manual preparation of various financial reports
 provides a balancing mechanism that helps to discover and correct errors
 a convenient source of data that facilitates the closing of the books of accounts at the
end of the accounting period.
 BUT IT'S NOT
 a book of original entry nor a journal, therefore, year-end adjustments should still be
recorded in a general journal
 a ledger, therefore, adjusting entries should still be posted in respective ledgers
 among the financial reports, therefore, financial statements should still be formally
prepared.
PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

Philippine Accounting Standard (PAS) 1 Presentation of Financial Statements sets out the
overall requirements for financial statements, including how they should be structured, the minimum
requirements for their content and overriding concepts such as going concern, the accrual basis of
accounting and the current/non-current distinction. The standard requires a complete set of financial
statements to comprise a statement of financial position, a statement of profit or loss and other
comprehensive income, a statement of changes in equity and a statement of cash flows. The objective
of presenting the general purpose financial statements is to provide information about the financial
position, financial performance and changes in the financial position of an enterprise, as well as its cash
flows.
The Income Statement provides information regarding the financial performance of the

business or its profitability which is important as this will enhance the resources of the business and its
capacity to generate cash and cash equivalents. An income statement (also known as the result of
operation of an entity) is a summary of income earned and expenses incurred for a certain period of
time. Income may be subdivided into two: regular or operating income and other income. There are two
presentation forms for cost and expenses: 1) based on its nature and 2) based on its function. (PAS 1.02-
1.03). The income statement you prepared for service-oriented business was based on the nature of
costs and expenses. This time, under merchandising operations, we will illustrate the presentation of
income statement according to the function of costs and expenses, i.e., cost of sales, distribution cost,
administrative cost and financial cost, to name a few. The International Accounting Standards states
that as a minimum, the face of the income statement should include only line items. It means that items
that are more or less similar in economic characteristics should be aggregated in the face of the report
and disaggregated in the supporting note to the financial statement.
The Statement of Changes in Equity shows the changes in the interest of the owner(s) for a
sole-proprietor owned business, partners in a partnership and shareholders in a corporation. Changes in
the owner's capital or owner's equity are summarized in this statement also known as the capital
statement. It explains what happened to the capital or claim of the owner.
The Statement of Financial Position detail the assets and liabilities of the business and shows
the residual interest of the owner as of a specific date. You will recall that there are also two forms used:
Account Form and Report Form. The rule on showing only line items also applies for the Statement of
Financial Position.
Statement of Cash Flows. IAS No. 7 Revised 2007 requires the preparation of this statement for
a certain period of time. This summarizes the cash activities of the business: cash inflows or sources of
cash and cash outflows or uses of cash.
Adequate Disclosures. This principle requires the inclusion of significant information that will help
enhance the firm’s financial statements. It also means that the users are informed of additional facts
that will aid them in properly interpreting the financial statements. PFRS 1/PAS 1.97-98 describes and
enumerates the significant information that must be disclosed either in the body of the financial
statements or in notes/supporting schedules to the financial statements.
CLOSING ENTRIES
After all the adjustments have been journalized and posted and the financial statements
prepared, the income and expense accounts and owner’s drawing account have to be closed. Closing
the books means bringing the temporary or nominal accounts to zero balance by transferring them to
the capital account or owner’s equity. Remember profit or loss goes to the owner. After the closing
entries, the books are "cleared" of these accounts so that in the next reporting period, the books are
ready for a new set of temporary or nominal accounts. This is the reason why the income statement
accounts are called nominal or temporary and that the heading of the income statement is only for one
accounting period. On the other hand, we carry forward the balances of the assets, liabilities, and
owner's equity to the next accounting period since these are real or permanent accounts and we don’t
close these accounts unless the assets are disposed, the liabilities are paid and the capital (representing
claim over the remaining assets) is returned to the owner.
In making the closing entries, the income statement column of the worksheet should be used as a
guide. The title Income Summary is an account used to close the nominal values and bring them to the
capital account.
The following are the steps in making the closing entries:
1) The revenue accounts which normally are credit balances should be closed on the debit side and
credited to the Income Summary account.
2) The expense accounts which normally are debit balances should be closed on the credit side and
debited to the Income Summary account.
3) Determine the balance of the Income Summary account which is a net income or a net loss.
Close a credit balance (representing a net income) by debiting the Income Summary account and
crediting the Owner's Capital account.
Close a debit balance (representing a net loss) by crediting the Income Summary account and debiting
the Owner's Capital Account.
4) The drawing account which normally is a debit balance is credited to close and debited to the capital
account to bring a reduction.
PREPARING A POST CLOSING TRIAL BALANCE

After accomplishing so many accounting steps, there is a need to prepare another trial balance
to prove the equality of the debits and credits. The Post Closing Trial Balance is prepared after closing
the books and contains only real accounts with balances. It has the same accounts as those found in the
statement of financial position.
Start of a New Accounting Period and Reversing Entries

OPENING ENTRY. As a new accounting or reporting period ensues, an opening entry is made to bring
forward the accounts with balances to the next accounting period and the post closing trial balance is
used as reference for the balances.
REVERSING ENTRIES. These are the opposite of adjusting entries and are prepared on the first day of the
succeeding reporting period. Deferrals, i.e., Prepaid Expenses under the expense method and Deferred
Income under the income method are the only items being reversed.
The reasons for making reversing entries are the following:
1) To close out the accounts created when the adjusting entries were prepared such as the prepaid
expense (under the expense method) and the deferred income (under the income method).
2) To recognize the expired/ income portion applicable for the succeeding period.
3) To simplify the bookkeeping entries in the following accounting period.

Module 8B

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WORKSHEET, WORKING PAPER, or SPREADSHEET...

PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

The Income Statement provides information regarding the financial performance of the

PREPARING A POST CLOSING TRIAL BALANCE

Start of a New Accounting Period and Reversing Entries

The reasons for making reversing entries are the following:

3) To simplify the bookkeeping entries in the following accounting period.

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