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MODULE 4: COMPLETING THE ACCOUNTING CYCLE

I. Learning Objectives

By the end of this module, the student should be able to:

1. Prepare a worksheet and financial statements in good form.
2. Prepare closing entries and a post-closing trial balance.
3. Explain the steps in the accounting cycle and how to prepare correcting entries.
4. Identify the sections of an/a income statement, balance sheet, and cash flow statement.

II. Introduction

The accounting cycle is a series of steps performed during the accounting period
(some throughout the period and some at the end) to analyze, record, classify, summarize,
and report useful financial information for the purpose of preparing financial statements. In
the summarizing stage, preparing worksheet is an important tool and starting point in making
a proper financial statements which are the income statement, balance sheet and cash flow
statement. There are four steps in making a worksheet: 1. by making unadjusted trial
balance, 2. posting the adjustment, 3. completing adjusted trial balance, and 4. extending the
adjusted amounts to the financial statement columns (income statement and balance sheet).

III. Lesson

CLO 1. Preparing a worksheet and financial statements in good form.

Worksheet.
 Is a multiple-column form used in preparing financial statements.
 Not a permanent accounting record.
 May be a computerized worksheet using an electronic spreadsheet program such as
Excel.
Steps in Preparing a Worksheet
 Prepared by using a four-step process.
 Use of worksheet is optional.
Steps in Preparing a Worksheet

Excerpts from 2015 John Wiley & Sons, Inc.

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Step 1: Prepare a Trial Balance on the Worksheet

BEAUTY & BEST SALOON
WORKSHEET
AUGUST 31, 2020

ADJUSTED
TRIAL BALANCE ADJUSTMENTS TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
Acct # ACCOUNT TITLES Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
100 Cash 117,500.00
101 Accounts Receivable 14,000.00
102 Notes Receivable 4,000.00
103 Saloon Supplies 15,000.00
104 Prepaid Rent
105 Prepaid Interest
110 Equipment - Saloon 70,000.00
111 Accumulated Depreciation - Equipment
200 Notes Payable 50,000.00
201 Accounts Payable 15,000.00
202 Salaries & Wages Payable
300 Casabuena's, Capital 150,000.00
301 Casabuena's, Drawing 13,000.00
400 Service Revenues 59,000.00
500 Salaries & Wages Expense 9,000.00
501 Rent Expense 18,000.00
502 Advertising Expense 2,500.00
503 Utilities Expense 2,000.00
504 Interest Expense 9,000.00
505 Depreciation Expense
506 Saloon Supplies Expense
302 Income Summary
TOTAL 274,000.00 274,000.00
Note: 1. Trial balance amounts were taken directly from the ledger accounts.
2. The total debit and credit balances must be the same amount.

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ADJUSTING JOURNAL ENTRIES

GENERAL JOURNAL J 2
DATE ACCOUNT TITLE Ref. Debit Credit
August 31 Saloon Supplies Expense 506 11,000.00
Saloon Supplies 103 11,000.00
To record saloon supplies used

Prepaid Interest 105 8,625.00

Interest Expense 504 8,625.00
To record prepaid interest.

Prepaid Rent 104 12,000.00

Rent Expense 501 12,000.00
To record prepaid interest.

Depreciation Expense 505 2,000.00

Accumulated Depreciation 111 2,000.00
To record depreciation of Equipment - Saloon for 1 month.

Salaries & Wages Expense 500 9,000.00

Salaries & Wages Payable 202 9,000.00
To record accrued salaries and wages

Step 2: Enter the adjustments in the adjustment column

BEAUTY & BEST SALOON
WORKSHEET
AUGUST 31, 2020

ADJUSTED
TRIAL BALANCE ADJUSTMENTS TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
Acct # ACCOUNT TITLES Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
100 Cash 117,500.00
101 Accounts Receivable 14,000.00
102 Notes Receivable 4,000.00
103 Saloon Supplies 15,000.00 11,000.00
104 Prepaid Rent 12,000.00
105 Prepaid Interest 8,625.00
110 Equipment - Saloon 70,000.00
111 Accumulated Depreciation - Equipment 2,000.00
200 Notes Payable 50,000.00
201 Accounts Payable 15,000.00
202 Salaries & Wages Payable 9,000.00
300 Casabuena's, Capital 150,000.00
301 Casabuena's, Drawing 13,000.00
400 Service Revenues 59,000.00
500 Salaries & Wages Expense 9,000.00 9,000.00
501 Rent Expense 18,000.00 12,000.00
502 Advertising Expense 2,500.00
503 Utilities Expense 2,000.00
504 Interest Expense 9,000.00 8,625.00
505 Depreciation Expense 2,000.00
506 Saloon Supplies Expense 11,000.00
302 Income Summary
TOTAL 274,000.00 274,000.00 42,625.00 42,625.00

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Step 3: Complete the Adjusted Trial Balance

BEAUTY & BEST SALOON

WORKSHEET
AUGUST 31, 2020

ADJUSTED
TRIAL BALANCE ADJUSTMENTS TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
Acct # ACCOUNT TITLES Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
100 Cash 117,500.00 117,500.00
101 Accounts Receivable 14,000.00 14,000.00
102 Notes Receivable 4,000.00 4,000.00
103 Saloon Supplies 15,000.00 11,000.00 4,000.00
104 Prepaid Rent 12,000.00 12,000.00
105 Prepaid Interest 8,625.00 8,625.00
110 Equipment - Saloon 70,000.00 70,000.00
111 Accumulated Depreciation - Equipment 2,000.00 2,000.00
200 Notes Payable 50,000.00 50,000.00
201 Accounts Payable 15,000.00 15,000.00
202 Salaries & Wages Payable 9,000.00 9,000.00
300 Casabuena's, Capital 150,000.00 150,000.00
301 Casabuena's, Drawing 13,000.00 13,000.00
400 Service Revenues 59,000.00 59,000.00
500 Salaries & Wages Expense 9,000.00 9,000.00 18,000.00
501 Rent Expense 18,000.00 12,000.00 6,000.00
502 Advertising Expense 2,500.00 2,500.00
503 Utilities Expense 2,000.00 2,000.00
504 Interest Expense 9,000.00 8,625.00 375.00
505 Depreciation Expense 2,000.00 2,000.00
506 Saloon Supplies Expense 11,000.00 11,000.00
302 Income Summary
TOTAL 274,000.00 274,000.00 42,625.00 42,625.00 285,000.00 285,000.00

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Step 4: Extend the adjusted amounts to Financial Statement Columns and Compute the Net
Income (Loss)

BEAUTY & BEST SALOON

WORKSHEET
AUGUST 31, 2020

ADJUSTED
TRIAL BALANCE ADJUSTMENTS TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
Acct # ACCOUNT TITLES Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
100 Cash 117,500.00 117,500.00 117,500.00
101 Accounts Receivable 14,000.00 14,000.00 14,000.00
102 Notes Receivable 4,000.00 4,000.00 4,000.00
103 Saloon Supplies 15,000.00 11,000.00 4,000.00 4,000.00
104 Prepaid Rent 12,000.00 12,000.00 12,000.00
105 Prepaid Interest 8,625.00 8,625.00 8,625.00
110 Equipment - Saloon 70,000.00 70,000.00 70,000.00
111 Accumulated Depreciation - Equipment 2,000.00 2,000.00 2,000.00
200 Notes Payable 50,000.00 50,000.00 50,000.00
201 Accounts Payable 15,000.00 15,000.00 15,000.00
202 Salaries & Wages Payable 9,000.00 9,000.00 9,000.00
300 Casabuena's, Capital 150,000.00 150,000.00 150,000.00
301 Casabuena's, Drawing 13,000.00 13,000.00 13,000.00
400 Service Revenues 59,000.00 59,000.00 59,000.00
500 Salaries & Wages Expense 9,000.00 9,000.00 18,000.00 18,000.00
501 Rent Expense 18,000.00 12,000.00 6,000.00 6,000.00
502 Advertising Expense 2,500.00 2,500.00 2,500.00
503 Utilities Expense 2,000.00 2,000.00 2,000.00
504 Interest Expense 9,000.00 8,625.00 375.00 375.00
505 Depreciation Expense 2,000.00 2,000.00 2,000.00
506 Saloon Supplies Expense 11,000.00 11,000.00 11,000.00
302 Income Summary 17,125.00 17,125.00
TOTAL 274,000.00 274,000.00 42,625.00 42,625.00 285,000.00 285,000.00 59,000.00 59,000.00 243,125.00 243,125.00

The amount in the Adjusted Trial Balance will be extended to either Income Statement or
Balance Sheet columns.

In Income Statement, only those Revenue and Expenses accounts will be reflected. While in
Balance Sheet, all Assets, Liabilities, and Owner’s Equity accounts will be reflected.

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Income summary amount is a balancing figure to determine the net income or loss. Thus, in
Income Statement column All Revenues will be deducted by All Expenses, and if the results:

a. All Revenues > All Expenses; the difference is net income and to be posted in the
“Debit” column in the Income Statement and “Credit” column in the Balance Sheet
column

b. All Revenues < All Expenses; the difference is net loss and to be posted in the
“Credit” column in the Income Statement and “Debit” column in the Balance Sheet
column

Preparing Financial Statements from a Worksheet

 Income statement is prepared from the income statement columns.
 Balance sheet and owner’s equity statement are prepared from the balance sheet
columns.
 Companies can prepare financial statements before they journalize and post adjusting
entries.

BEAUTY & BEST SALOON

INCOME STATEMENT
For the Month Ended August 31, 2020

In Philippine Peso
Service Revenues 59,000.00
Less: Expenses:
Salaries & Wages Expense 18,000.00
Rent Expense 6,000.00
Advertising Expense 2,500.00
Utilities Expense 2,000.00
Interest Expense 375.00
Depreciation Expense 2,000.00
Saloon Supplies Expense 11,000.00
Total Expenses 41,875.00
Net Income 17,125.00

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BEAUTY & BEST SALOON

OWNER'S EQUITY STATEMENT
For the Month Ended August 31, 2020

In Philippine Peso
Casabuena's Capital - Aug.1 -
Add: Investments 150,000.00
Net Income 17,125.00
TOTAL 167,125.00
Less: Casabuena's Drawing 13,000.00
Casabuena's Capital - August 31 154,125.00

BEAUTY & BEST SALOON

BALANCE SHEET
August 31, 2020

In Philippine Peso
ASSETS
Current Assets:
Cash 117,500.00
Accounts Receivable 14,000.00
Notes Receivable 4,000.00
Saloon Supplies 4,000.00
Prepaid Rent 12,000.00
Prepaid Interest 8,625.00
Total Current Assets 160,125.00

Non-Current Assets:
Equipment - Saloon 70,000.00
Less: Accumulated Depreciation - Equipment 2,000.00
Total Non-Current Assets, net 68,000.00

TOTAL ASSETS 228,125.00

LIABILITIES & OWNER'S EQUITY

LIABILITIES
Current Liabilities:
Notes Payable 50,000.00
Accounts Payable 15,000.00
Salaries & Wages Payable 9,000.00
Total Current Liabilities 74,000.00

OWNER'S EQUITY
Casabuena's Capital - August 31 154,125.00

LIABILITIES & OWNER'S EQUITY 228,125.00

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BEAUTY & BEST SALOON

STATEMENT OF CASH FLOW
For the Month Ended August 31, 2020

In Philippine Peso
Cash Flow from Operating Activities:
Cash received from customers for rendering of services Note 1 41,000.00
Cash payment for payment of salaries & wages (9,000.00)
Cash payment for rentals (18,000.00)
Cash payment for advertising (2,500.00)
Cash payment for utilities (2,000.00)
Net Cash Provided by Operating Activties 9,500.00

Cash Flow from Investing Activities:

Cash paid for purchase of equipment (70,000.00)
Net Cash Used in Investing Activities (70,000.00)

Cash Flow from Financing Activities:

Cash receive from original investments 150,000.00
Proceeds from bank loan 41,000.00
Casabuena's withdrawal (13,000.00)
Net Cash Provided from Financing Activities 178,000.00

Increase in Cash 117,500.00

Add: Cash Balance - August 1 -
Cash Balance - August 31 117,500.00

Note 1: Cash received from rendering of services:

August 6. Services performed for Cash 12,000.00
August 10. Services performed for Cash 15,000.00
August 18. Collections from accounts receivable 6,000.00
August 27. Collections from notes receivable
for services performed in August 25 8,000.00
TOTAL 41,000.00

CLO 2. Prepare closing entries and a post-closing trial balance.

At the end of the accounting period, the company makes the accounts ready for the next
period.

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Preparing Closing Entries

 Closing entries formally recognize in the ledger the transfer of
o net income (or net loss) and
o owner’s drawings to owner’s capital.

Companies generally journalize and post closing entries only at the end of the annual

Preparing Closing Entries

accounting period.

Closing entries produce a zero balance in each temporary account.

Owner’s Capital is a
permanent account.
All other accounts are
temporary accounts.

Excerpts from 2015 John Wiley & Sons, Inc. LO 2

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CLOSING ENTRIES
GENERAL JOURNAL J3
DATE ACCOUNT TITLE Ref. Debit Credit
August 31 Service Revenues 400 59,000.00
Income Summary 302 59,000.00
To close service revenues account

31 Income Summary 302 41,875.00

Salalaries & Wages Expense 500 18,000.00
Rent Expense 501 6,000.00
Advertising Expense 502 2,500.00
Utilities Expense 503 2,000.00
Interest Expense 504 375.00
Depreciation Expense 505 2,000.00
Saloon Supplies Expense 506 11,000.00
To close expenses account

31 Income Summary 302 17,125.00

Casabuena's Capital 300 17,125.00
To close income summary to capital account

31 Casabuena's Capital 300 13,000.00

Casabuena's Drawing 301 13,000.00
To close drawing account to capital account
Note: The closing entries will be posted in the ledger the same manner in previous
illustrations in Beauty & Best Saloon.

Preparing a Post-Closing Trial Balance

The last step in the accounting cycle is to prepare a post-closing trial balance.
A post-closing trial balance is prepared after closing entries are made and posted to the
ledger.

Purpose is to prove the equality of the permanent account balances carried forward
into the next accounting period. The post-closing trial balance of Beauty & Best Saloon on
August 31, 2020 were presented on the next page:

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BEAUTY & BEST SALOON

POST-CLOSING TRIAL BALANCE
August 31, 2020

Account No. Account Title Debit Credit

100 Cash 117,500.00
101 Accounts Receivable 14,000.00
102 Notes Receivable 4,000.00
103 Saloon Supplies 4,000.00
104 Prepaid Rent 12,000.00
105 Prepaid Interest 8,625.00
110 Equipment - Saloon 70,000.00
111 Accumulated Depreciation - Equipment 2,000.00
200 Notes Payable 50,000.00
201 Accounts Payable 15,000.00
202 Salaries & Wages Payable 9,000.00
300 Casabuena's, Capital 154,125.00
TOTAL 230,125.00 230,125.00
Explain the steps in the accounting
LEARNING
OBJECTIVE
3 cycle and how to prepare correcting
entries.
CLO 3. Explain the steps in the accounting cycle and how to prepare correcting entries.

1. Analyze business transactions

9. Prepare a post-closing 2. Journalize the

trial balance transactions

8. Journalize and post

3. Post to ledger accounts
closing entries

7. Prepare financial
4. Prepare a trial balance
statements

6. Prepare an adjusted trial 5. Journalize and post

balance adjusting entries

Excerpts from 2015 John Wiley & Sons, Inc. LO 3

Correcting Entries—An Avoidable Step

 Unnecessary if accounting records are free of errors.
 Made whenever an error is discovered.
 Must be posted before closing entries.

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Instead of preparing a correcting entry, it is possible to reverse the incorrect entry and
then prepare the correct entry.

CASE 1: On May 10, Mercato Co. journalized and posted a $50 cash collection on
account from a customer as a debit to Cash $50 and a credit to Service Revenue $50. The
company discovered the error on May 20, when the customer paid the remaining balance
in full.

Incorrect Entry:
Cash 50
Service Revenue 50

Correct Entry:
Cash 50
Accounts Receivable 50

Correcting Entry:
Service Revenue 50
Accounts Receivable 50

CASE 2: On May 18, Mercato purchased on account equipment costing $450. The
transaction was journalized and posted as a debit to Equipment $45 and a credit to
Accounts Payable $45. The error was discovered on June 3.
Incorrect Entry:
Equipment 45
Accounts Payable 45

Correct Entry:
Equipment 450
Accounts Payable 450

Correcting Entry:
Equipment 405
Accounts Payable 405

CLO 4. Identify the sections of an/a income statement, balance sheet, and cash flow
statement.

Income Statement
 Presents a snapshot at a point in time.
 To improve understanding, companies group similar assets and similar liabilities
together.

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BEAUTY & BEST SALOON

INCOME STATEMENT
For the Month Ended August 31, 2020

In Philippine Peso
Service Revenues 59,000.00
Less: Expenses:
Salaries & Wages Expense 18,000.00
Rent Expense 6,000.00
Advertising Expense 2,500.00
Utilities Expense 2,000.00
Interest Expense 375.00
Depreciation Expense 2,000.00
Saloon Supplies Expense 11,000.00
Total Expenses 41,875.00
Net Income 17,125.00

Revenue is the amount a company receives from selling goods and/or providing services to
its customers and clients. A company's revenue, which is reported on the first line of
its income statement, is often described as sales or service revenues. Hence, revenue is the
amount earned from customers and clients before subtracting the company's expenses.

Under the accrual method of accounting, an expense is a cost that is reported on the income
statement for the period in which:
1. The cost best matches the related revenues
2. The cost is used up or expires
3. There is uncertainty or difficulty in measuring the future benefit of the cost

BEAUTY & BEST SALOON

BALANCE SHEET
August 31, 2020

In Philippine Peso
ASSETS
Current Assets:
Cash 117,500.00
Accounts Receivable 14,000.00
Notes Receivable 4,000.00
Saloon Supplies 4,000.00
Prepaid Rent 12,000.00
Prepaid Interest 8,625.00
Total Current Assets 160,125.00

Non-Current Assets:
Equipment – Saloon 70,000.00
Less: Accumulated Depreciation –
Equipment 2,000.00
Total Non-Current Assets, net 68,000.00

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TOTAL ASSETS 228,125.00

LIABILITIES & OWNER'S EQUITY

LIABILITIES
Current Liabilities:
Notes Payable 50,000.00
Accounts Payable 15,000.00
Salaries & Wages Payable 9,000.00
Total Current Liabilities 74,000.00

OWNER'S EQUITY
Casabuena's Capital - August 31 154,125.00

LIABILITIES & OWNER'S EQUITY 228,125.00

Assets can be defined as a resources or things of value that are owned by a company as the
result of company transactions, prepaid expenses that have not yet been used up or have not
yet expired, and costs that have a future value that can be measured reliably. Assets can be
classified into:

1. Current Assets include cash and assets that are expected to turn to cash within one
year of the balance sheet date. Current assets also include prepaid expenses that will be used
up within one year. If a company's operating cycle is longer than one year, the length of the
operating cycle is used in place of the one-year time period.

2. Noncurrent Asset is an asset that is not expected to turn to cash within one year of
date shown on a company's balance sheet. A noncurrent asset is also known as a long-term
asset.

Liability is defined as the future sacrifices of economic benefits that the entity is obliged to
make to other entities as a result of past transactions or other past events, the settlement of
which may result in the transfer or use of assets, provision of services or other yielding of
economic benefits in the future. A liability is classified into:

1. Current Liabilities is an obligation that is payable within one year. Current

liabilities are a company's short-term financial obligations that are due within one
year or within a normal operating cycle. An operating cycle, also referred to as
the cash conversion cycle, is the time it takes a company to purchase inventory and
convert it to cash from sales. An example of a current liability is money owed to
suppliers in the form of accounts payable.

2. Noncurrent Liabilities, also called long-term liabilities or long-term debts, are long-
term financial obligations listed on a company’s balance sheet. These liabilities have
obligations that become due beyond twelve months in the future, as opposed to
current liabilities which are short-term debts with maturity dates within the following
twelve-month period.

Owner's Equity represents the owner's investment in the business minus the owner's
draws or withdrawals from the business plus the net income (or minus the net loss) since the

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business began. Owner's equity is viewed as a residual claim on the business assets
because liabilities have a higher claim. Owner's equity can also be viewed (along with
liabilities) as a source of the business assets.

BEAUTY & BEST SALOON

STATEMENT OF CASH FLOW
For the Month Ended August 31, 2020

In Philippine Peso
Cash Flow from Operating Activities:
Cash received from customers for rendering of services Note 1 41,000.00
Cash payment for payment of salaries & wages (9,000.00)
Cash payment for rentals (18,000.00)
Cash payment for advertising (2,500.00)
Cash payment for utilities (2,000.00)
Net Cash Provided by Operating Activties 9,500.00

Cash Flow from Investing Activities:

Cash paid for purchase of equipment (70,000.00)
Net Cash Used in Investing Activities (70,000.00)

Cash Flow from Financing Activities:

Cash receive from original investments 150,000.00
Proceeds from bank loan 41,000.00
Casabuena's withdrawal (13,000.00)
Net Cash Provided from Financing Activities 178,000.00

Increase in Cash 117,500.00

Add: Cash Balance - August 1 -
Cash Balance - August 31 117,500.00

Note 1: Cash received from rendering of services:

August 6. Services performed for Cash 12,000.00
August 10. Services performed for Cash 15,000.00
August 18. Collections from accounts receivable 6,000.00
August 27. Collections from notes receivable
for services performed in August 25 8,000.00
TOTAL 41,000.00

Statement of Cash Flows or Cash Flow Statement is one of the three key financial
statements that report the cash generated and spent during a specific period of time (e.g., a
month, quarter, or year). The statement of cash flows acts as a bridge between the income
statement and balance sheet by showing how money moved in and out of the business during
the period.

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Three Sections of the Statement of Cash Flows:

1. Operating Activities: The principal revenue-generating activities of an organization

and other activities that are not investing or financing; any cash flows from current
assets and current liabilities.
2. Investing Activities: Any cash flows from the acquisition and disposal of long-term
assets and other investments not included in cash equivalents.
3. Financing Activities: Any cash flows that result in changes in the size and
composition of the contributed equity capital or borrowings of the entity (i.e., bonds,
stock, dividends)

IV. Learning Activities

MUST DO 1. (CLO 3) Correcting Entries

Manalansan Company discovered the following errors made in January 2020.
1. A payment of Salaries and Wages Expense of Php60,000 was debited to Supplies and
credited to Cash, both for Php60,000.
2. A collection of Php13,000 from a client on account was debited to Cash Php1,300 and
credited to Service Revenue Php1,300.
3. The purchase of supplies on account for Php960 was debited to Supplies Php690 and
credited to Accounts Payable Php690.

Correct the errors without reversing the incorrect entry.

MUST DO 2. (CLO 4) Discuss the importance of each financial statements:

1. Income Statement
2. Balance Sheet
3. Statement of Cash Flow

PRACTICE SHEET. (CLO 1, 2, and 4). From Practice Sheet in Module 2 and 3 of “Tel
Y Dress Shop”, prepare the following:
1. Worksheet in a 10-column columnar pad.
2. Closing entries to close the temporary accounts. The closing entries must be
recorded un the general journal used in Module 2 and 3.
3. Post-Closing Trial Balance. Use a 2-column columnar pad
4. Financial Statements in good form: (Use short size bond paper for each financial
statement stated below)
a. Income Statement,
b. Balance Sheet, and
c. Cash Flow Statement

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