BM2409
PREPARATION OF THE ACCOUNTING WORKSHEET; COMPLETING THE
ACCOUNTING CYCLE: CLOSING ENTRIES AND REVERSING ENTRIES
The Worksheet
A worksheet is a document with several columns often used by accountants to summarize financial statement
data. It is not a journal, a ledger, or a financial statement. It is simply a working paper that makes preparing
financial statements easier. It is important to note 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, 2022)
Steps in preparing the worksheet:
1. Enter the account titles and their unadjusted balances (general ledger 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 correctly listed (Assets, Liabilities, Capital, Income,
and Expenses). The assets should be arranged according to liquidity, from the most liquid (Cash) to the
least liquid (Property, Plant, and Equipment). Total debits must always equal total credits.
MAC CO.
Worksheet
December 31, 2022
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
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
03 Handout 1 *Property of STI
Page 1 of 8
BM2409
2. Enter the adjusting entries in the Adjustments columns and total the amounts.
MAC CO.
Worksheet
December 31, 2022
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
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 –
7,200
Equip.
Accum. Depr’n. –
7,200
Equip.
Total 1,065,000 1,065,000 64,200 64,200
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, 2022
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. In contrast, all real accounts (assets, liabilities, and capital/equity) are copied to the
Balance Sheet columns.
03 Handout 1 *Property of STI
Page 2 of 8
BM2409
MAC CO.
Worksheet
December 31, 2022
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 30,000 100,000 100,000
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 balance 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, resulting in a difference of P133,300, which will be a net income because total
credits (revenues) exceed total debits (expenses).
Completing the Accounting Cycle, Closing Entries, and Reversing Entries
Preparing Financial Statements from a Worksheet
The worksheet is useful for accountants in adjusting entries, preparing financial statements, and closing
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 in the previous weeks, the same concepts are
used in preparing the income statement and the balance sheet.
MAC CO.
Income Statement
For the month ended December 31, 2022
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
03 Handout 1 *Property of STI
Page 3 of 8
BM2409
MAC CO.
Balance Sheet
As of December 31, 2022
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 133,300 818,300
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 accounting period. Closing consists of journalizing and posting
the closing entries to prepare the accounts for the next period. The closing process zeroes out all the revenues
and expenses 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 the drawing (Horngren, Harrison Jr., &
Oliver, Accounting (12th Edition), 2020).
Recall that the income statement reports net income for a specific period. For example, the business’ net
income for 2022 relates exclusively to 2022. On December 31, 2022, Mac Co. closed 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 on December 31, 2022, is P265,000. This
balance relates exclusively to December and must be zeroed out before Mac Co. records revenue for the next
accounting period. Similarly, the various expense account balances are for December only and must 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 because they are part of the accounting equation.
03 Handout 1 *Property of STI
Page 4 of 8
BM2409
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, revenues and 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” showing the 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, Accounting (12th Edition), 2020).
The following are the four (4) steps in closing the books (Rante, Fundamentals of Accounting (Accounting for
Service, Merchandising and Manufacturing Entities), 2020). Debit each revenue account for the amount of its
credit balance, then credit the 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.
1. Credit each expense account for the amount of its debit balance and credit the 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.
2. 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 the operation and vice versa. Finally, the
balance is closed to the Capital account.
Particulars PR Debit Credit
Dec. 31 Income Summary 133,300
Mac, Capital 133,300
To close income summary account to capital.
3. The drawing account is also closed to the capital account. The drawing account’s normal balance is
debited. We must credit and debit the capital account to close the drawing account.
03 Handout 1 *Property of STI
Page 5 of 8
BM2409
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
133,300
0
NOTE: The Income Summary account is just an internal account title (only appears in the working paper) and
is not included in the face of the financial statements.
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, 2022
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 the real accounts (assets, liabilities, and capital accounts) appear on the post-closing trial balance. No
nominal accounts (revenues, expenses, or drawing) are included because they have already been closed (their
balances are zero). The ledger is now up-to-date and ready for the next period(Horngren, Harrison Jr., & Oliver,
Accounting (12th Edition), 2020).
03 Handout 1 *Property of STI
Page 6 of 8
BM2409
Reversing Entries
Reversing entries are no longer part of the accounting cycle because these are prepared at the beginning of
the next accounting period. Moreover, reversing entries is also optional or discretionary, depending on the
usual practice of the company’s accountant. For example, the accrued salaries at the end of the accounting
period may or may not be reversed depending on the usual practice of the accountant. If it’s the usual practice
of the accountant to reverse, then reversing entries should be prepared. In the real world, it’s the normal
practice of the accountant to reverse entries, particularly accrual entries. 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. Customers make advance payments if the initial entry to record the transaction is credited to the revenue
account.
4. Provision for uncollectible accounts and depreciation are not reversed.
Illustration: The following data for adjustments on December 31, 2022, are available from the records of ABC
Advertising Company:
1. The Insurance Expense account has a debit of P21,120, representing the cost of a 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, which
represented a 3-month rental of a van for displaying their new products.
3. The advertising materials purchased during the last quarter of the year for P4,800 were recorded as
debiting Advertising Supplies Expenses. The physical count of materials at year-end revealed that P1,200
are on hand.
4. Salaries and wages for the last week of December amounting to P5,600 was accrued.
5. ABC Advertising Company's service vehicle, 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
03 Handout 1 *Property of STI
Page 7 of 8
BM2409
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
Accounting. (2022). Retrieved from Philippine Accounting Updates: http://philcpa.org/accounting-auditing-
standards/accounting/
Accounting Concept and Principles. (2020). Retrieved from Accounting Concept and Principles:
http://accounting-simplified.com/financial-accounting/accounting-concepts-and-principles/
Ballada, W. (2022). Basic Financial Accounting and Reporting. Domdane Publishers.
Horngren, C. T., Harrison Jr., W. T., & Oliver, M. S. (2012). Accounting. Prentice Hall.
Horngren, C. T., Harrison Jr., W. T., & Oliver, M. S. (2020). Accounting (12th Edition). Prentice Hall.
Needles, B. E., Powers, M., & Crosson, S. V. (2022). Principles of Accounting. Cengage Learning.
Rante, G. A. (2013). Fundamentals of Accounting (Accounting for Service, Merchandising and Manufacturing
Entities). Millenium Books, Inc.
Rante, G. A. (2020). Fundamentals of Accounting (Accounting for Service, Merchandising and Manufacturing
Entities). Millenium Books, Inc.
The Source Document in an Accounting Transaction. (2020, March 20). Retrieved from The Balance:
https://www.thebalance.com/the-source-document-in-an-accounting-transaction-393005
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Accounting Principles (Twelfth Edition). John Wiley & Sons,
Inc.
What is Accounting. (2022). Retrieved from AccountingVerse: http://www.accountingverse.com/accounting-
basics/what-is-accounting.html
03 Handout 1 *Property of STI
Page 8 of 8
