We have learned in the past modules that the basic

financial statements include:

• The Statement of Financial Position (Balance
Sheet)
• The Statement of Financial Performance
(Income Statement)
• The Statement of Changes in Equity and
• The Statement of Cash Flows
In this module, we will learn how to prepare the
financial statements based on the worksheet.

The Worksheet

• A worksheet is a multiple-column form that

may be used in the adjustment process and in
preparing financial statements.
• It is a working tool or a supplementary device
for the accountant and not a permanent
accounting record.
• The use of a worksheet should make the Preparing the Financial Statements
preparation of adjusting entries and financial Financial statements can be prepared directly from an
statements easier. adjusted trial balance.
1. The Income Statement is prepared from the
revenue and expense accounts.
2. The Statement of Owner’s Equity is derived
from the owner’s capital and drawings accounts
and the net income (or net loss) shown in the
income statement.
3. The Balance Sheet is then prepared from the
asset and liability accounts and the ending
owner’s capital balance as reported in the
statement of owner’s equity.
Adjusted Trial Balance
• The Adjusted Trial Balance is prepared after all
adjusting entries have been journalized and
posted.
• It shows the balances of all accounts at the end
of the accounting period and the effects of all
financial events that have occurred during the
period.
• It proves the equality of the total debit and
credit balances in the ledger after all
adjustments have been made.
• Financial statements can be prepared directly
from the adjusted trial balance.
 The Financial Statements

After transactions are identified, recorded, and

summarized, four (4) Financial Statements are prepared
from the summarized accounting data:
1. An Income Statement presents the revenues
and expenses and resulting net income or net
loss of a company for a specific period of time.
2. A Statement of Owner’s Equity summarizes the
changes in owner’s equity for a specific period
of time.
3. A Balance Sheet reports the assets, liabilities,
and owner’s equity of a business enterprise at a
specific date.
4. A Cash Flow Statement summarizes
information concerning the cash inflows
(receipts) and outflows (payments) for a
specific period of time.
5. The Notes are an integral part of the financial
statements.

Purpose of Closing Entries

4. Updates the owner’s capital account in the
ledger by transferring net income (loss) and
owner’s drawings to the owner’s capital.
5. Prepares the temporary accounts (revenue,
expense, drawings) for the next period’s
postings by reducing their balances to zero.

Temporary Versus Permanent Accounts

 The Reversing Entries / Correcting Entries
To open the new accounting period, we have the:
• opening entry -entry to transfer all the balance
sheet accounts of the previous period to the
new accounting period which should also be
posted in the corresponding General ledgers.
• reversing entry (optional)
The Reversing Entries (Optional Step)

• A reversing entry is made at the beginning of

the next accounting period.
• A reversing entry reverses certain adjusting
entries made in the previous period.
• Opening balances can then be ignored when
preparing year-end adjusting entries.
• Eliminates monitoring balances of receivables
and payables which were created by adjusting
entries
• Collections and payments in the succeeding
period are done in the usual manner
• Optional Step: If the entity is using the
Asset/Liability method in recording its
transactions for:
1. cash payment for unutilized expenses (Prepaid
Insurance)
The Post-Closing Trial Balance 2. cash received for un-rendered service
(Unearned Income)
• After all closing entries have been • Applicable only: If the entity is using the
Expense/Income method in recording its
journalized and posted, a post-closing trial
transactions for:
balance is prepared. 1. cash payment for unutilized expenses
• The purpose of this trial balance is to prove (Insurance Expense)
the equality of the permanent (balance 2. cash received for unrendered service (Service
sheet) account balances that are carried income)
forward into the next accounting period.
Correcting Entries

• Errors that occur in recording transactions

should be corrected as soon as they are
discovered by preparing correcting entries.
• Correcting entries are unnecessary if the
records are free of errors; they can be
journalized and posted whenever an error
is discovered.
• They involve any combination of balance
sheet and income statement accounts.