Completing the Accounting Cycle

Summary of
Using a Closing the Classified
Accounting
Worksheet Books Balance Sheet
Cycle

Steps in Preparing closing Reversing Current assets

preparation entries entries—
entries—An Long--term
Long
Preparing financial Posting closing optional step investments
statements entries Correcting Property, plant, and
Preparing Preparing a post-
post- entries—
entries—An equipment
By: Ika Putri Larasati SE., MCom adjusting entries closing trial avoidable step
Intangible assets
balance
Current liabilities
Long--term liabilities
Long
Owner’s equity

Source: Kieso, Weygandt, Warfield, Intermediate Accounting, 2008: 148-149

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

Dividends Equity

1
 Closing entries formally recognize, in the general
ledger, the transfer of
Note:
net income (or net loss) and
Owner’s Drawing is closed
owner’s drawing directly to Capital and not
to Income Summary
Owner’s Capital is a
to owner’s capital. because Owner’s Drawing permanent account;
all other accounts
is not an expense. are temporary
accounts.
Closing entries are only at the end of the annual
accounting period.

Note: Closing
Dividends is closed Entries
need
directly to Retained
to be
Earning and not to Income Posted
Retained Earning Retained Earning is
Summary because a permanent
account; all other
Dividends is not an accounts are
expense. temporary accounts.

1. Close Revenue to Income Summary Dividends

2. Close Expenses to Income Summary
3. Close Income Summary to Retained Earning Source: Kieso,
4. Close Dividends to Retained Earning Weygandt, Warfield,
Intermediate Accounting,
2008: 151

2
 Transactions
Purpose is to prove the equality of the permanent account
balances after journalizing and posting of closing entries.
9. Reversing entries 1. Journalization
Temporary
8. Post-closing trial balance 2. Posting accounts
will have
7. Closing entries 3. Trial balance zero
balances.
Work
6. Financial Statements Sheet 4. Adjustments

5. Adjusted trial balance

Source: Kieso,
Weygandt, Warfield,
Intermediate Accounting,
2008: 153
Source: Kieso, Weygandt, Warfield, Intermediate Accounting, 2008: 68

Transactions
Correcting entries
9. Reversing entries 1. Journalization
are unnecessary if the records are error-free.

8. Post-closing trail balance 2. Posting are made whenever an error is discovered.

must be posted before closing entries.
7. Closing entries 3. Trial balance
Instead of preparing a correcting entry, it is possible
6. Financial Statements
Work
4. Adjustments to reverse the incorrect entry and then prepare the
Sheet
correct entry.
5. Adjusted trial balance

3
Illustration (Case 1): On May 10, Mercato Co. journalized and Illustration (Case 2): On May 18, Mercato purchased on account
posted a $50 cash collection on account from a customer as a office equipment costing $450. The transaction was journalized
debit to Cash $50 and a credit to Service Revenue $50. The and posted as a debit to Delivery Equipment $45 and a credit to
company discovered the error on May 20, when the customer Accounts Payable $45. The error was discovered on June 3.
paid the remaining balance in full.
Incorrect Delivery equipment 45
Incorrect Cash 50 entry
entry Accounts payable 45
Service revenue 50
Correct Office equipment 450
Correct Cash 50 entry Accounts payable 450
entry Accounts receivable 50
Correcting Office equipment 450
Correcting Service revenue 50 entry Delivery equipment 45
entry Accounts receivable 50 Accounts payable 405

Transactions
It is often helpful to reverse some of the adjusting
9. Reversing entries 1. Journalization entries before recording the regular transactions of
the next period.
8. Post-closing trail balance 2. Posting Companies make a reversing entry at the beginning
of the next accounting period.
7. Closing entries 3. Trial balance
Each reversing entry is the exact opposite of the
adjusting entry made in the previous period.
Work
6. Financial Statements Sheet 4. Adjustments
The use of reversing entries does not change the
5. Adjusted trial balance amounts reported in the financial statements.

4
Illustration: To illustrate the optional use of reversing With Reversing Entries
(per appendix)
entries for accrued expenses, we will use the salaries
Initial Salary Entry
expense transactions for Pioneer Advertising Agency.
Oct. 26 Same entry
1. October 26 (initial salary entry): Pioneer pays $4,000 of
Adjusting Entry
salaries earned between October 15 and October 26. Oct. 31 Same entry

2. October 31 (adjusting entry): Salaries earned between Closing Entry

October 29 and October 31 are $1,200. The company will pay Oct. 31 Same entry
these in the November 9 payroll.
Reversing Entry
3. November 9 (subsequent salary entry): Salaries paid are Nov. 1 Salaries payable 1,200
Salaries expense 1,200
$4,000. Of this amount, $1,200 applied to accrued wages
Subsequent Salary Entry
payable and $2,800 was earned between November 1 and
Nov. 9 Salaries expense 4,000
November 9. Cash 4,000

La Bamba Company pays salaries of $10,000 every

Monday for the preceding 5-day week (Monday
through Friday). Assume December 31 falls on a
Tuesday so LaBamba’s employees have worked 2
days without being paid

Instructions!
• Assume the company does not use reversing entries.
Prepare the December 31 adjusting entry and the entry on
Monday, January 6, when LaBamba pays the payroll

• Assume the company uses reversing entries. Prepare the

December 31 adjusting entry, the January 1 reversing entry,
and the entry on Monday, January 6, when LaBamba pays the
payroll