Vous êtes sur la page 1sur 94

ACTG 101

FUNDAMENTALS OF
ACCOUNTING
TEXTBOOK: THE ACCOUNTING
PROCESS – BASIC CONCEPTS AND
PROCEDURES (21ST ED) MANILA
AUTHORS: MANUEL, Z. V. C. (2015)
TOPIC 4:
ACCOUNTING PROCESS FOR
MERCHANDISING TYPE OF
BUSINESS – PART II
Coverage
Journalizing or recording various business
transactions by applying the rules of double
entry system with the use of special journals
THE SPECIAL JOURNALS
Business enterprise may encounter large
quantities of similar and recurring
transactions which may create congestion
and confusion if recorded repeatedly in a
single day or a month in the general
journal
In merchandising business, sales
transactions occur a number of times so it
would be unnecessary and impractical to
4
credit the SALES account repeatedly
THE SPECIAL JOURNALS
Special journal may be prepared to facilitate
efficient and practical recording of similar and
recurring transactions
Advantages of using the special journals:
It is time saving
Division of labor is possible
Specialization and pinpointing of responsibility
Errors are minimized

5
THE SPECIAL JOURNALS
Five commonly recurring transactions that are
recorded, namely:
Purchases on account or on cash
Payments of purchases on account
Selling on credit or on cash
Collection from the cash or credit customers
Miscellaneous transactions

6
RELATIONSHIP OF SPECIAL JOURNALS AND
THE GENERAL JOURNAL
Contents
Transactions Journals Described
1. Buying PURCHASES All purchases of
ON ACCOUNT merchandise on
JOURNAL account

2.Cash CASH All cash


Payments PAYMENTS payments
JOURNAL
RELATIONSHIP OF SPECIAL JOURNALS AND
THE GENERAL JOURNAL
Contents
Transactions Journals Described
3.Selling SALES ON All sales of
ACCOUNT merchandise on
JOURNAL account
4.Cash CASH All cash receipts
Receipts RECEIPTS
JOURNAL
RELATIONSHIP OF SPECIAL JOURNALS AND
THE GENERAL JOURNAL
Contents
Transactions Journals Described
5.Miscellan GENERAL Miscellaneous
eous JOURNAL transactions that
cannot be
recorded in the
four special
journals 9
RELATIONSHIP OF SPECIAL JOURNALS AND
THE GENERAL JOURNAL
 There can only be one original journal. Therefore
the aforementioned journals serve as the books
of original entry.
 Any transactions recorded in the above journals
shall not anymore be recorded in the general
journal.
 General journal shall only be used for other
entries not recorded in the special journals such
as adjusting, closing and reversing entries
SALES JOURNAL
Where all sales are recorded on Account
If in cash, using the cash register, entry is
lumped by week and recorded in the Cash
Receipts Journal
SALES JOURNAL
SALES JOURNAL
Post. Accounts Receivable Output Tax (12%) Sales
Date Invoice No. Account Debited Ref Debit Credit Credit
SUBSIDIARY LEDGER
Where Accounts Receivable is recorded
by customer
Total of the ledgers would equal the
Accounts Receivable General Ledger
Account
SUBSIDIARY LEDGERS
Name: _________________________________________________

Date Explanation Post. Ref. Debit Credit Balance


PURCHASES ON ACCOUNT JOURNAL
Or Purchase Journal is used as the book
of original entry to record several
purchases on account
Source document is the invoices from
the enterprise’s several suppliers
At the end of the day or month, the
money columns of the Purchases
Journal are added and then posted to
the Purchases and Accounts Payable
15
General Ledgers
PURCHASES ON ACCOUNT JOURNAL
PURCHASES JOURNAL
Post. Purchases Input Tax (12%) Accounts Payable
Date R.R. No. Account Credited Ref Debit Debit Credit

16
PURCHASES ON ACCOUNT JOURNAL
Accounts Payable Subsidiary Ledgers
are used to record the business’
liabilities to several suppliers
Name: _________________________________________________

Date Explanation Post. Ref. Debit Credit Balance


CASH PAYMENTS JOURNAL
Or Cash Disbursements Journal
All cash payments are recorded in this
journal such as:
Cash purchases of merchandise and other
assets
Payments of accounts and other liabilities
Payments of expenses
Cash withdrawals of owner
Cash refunds of customers
CASH DISBURSEMENTS JOURNAL
CASH DISBURSEMENTS JOURNAL
Credits Debits Other Accounts
Purchase Post. Accounts Post.
Date Check No. Description Cash Input Tax Discount Ref Payable Input Tax Purchases Account Title Ref Debit Credit
CASH RECEIPTS JOURNAL
Book of original entry where all cash
receipt transactions are recorded
Cash investment, loans, cash sales,
collections of customers’ accounts and
cash refund
CASH RECEIPTS JOURNAL
CASH RECEIPTS JOURNAL
Sales Accounts
Cash Discount Receivable Sales Sundry
Date Received From Explanation OR# Debit Debit F Credit Credit Account Title F Debit Credit

21
RECORDING PROCESS FLOWCHART
1 2 Journalize effects in the journal through
Receipts General Journal
the journal entries
Invoices
Post the debit and credit values in the
3 General Ledger journal to their respective accounts in
the ledger
Organize the information in the ledger
4 Working Paper
using the working paper

FINANCIAL Formalize into good form financial


5 REPORTS reports

STATEMENT OF STATEMENT OF CASH FLOWS


INCOME FINANCIAL STATEMENT
OWNER’S EQUITY
STATEMENT POSITION
Beginning Capital + Beginning Cash
Additional Investment + Net
Revenue – Income – Net Loss – + or –
Assets = Liabilities Withdrawals = Ending Capital Net Cash Flows
Expenses = + Capital = 22
Income (Loss)
Ending Capital
POSTING TO THE GENERAL LEDGER
All column totals from the Special Journals
are posted in the general ledger
Transactions in the General Journal are
posted to the General Ledger Individually
Get total of the General Ledger
Each account balance is determined by footing
(adding) all the debits and credits
If the sum of an account’s debits is greater than the
sum of its credits, that account has a debit balance
If the sum of its credits is greater, that account has
a credit balance
TRIAL BALANCE
List of all accounts with their respective debit
or credit balances.
Prepared to verify the equality of debits and
credits in the ledger at the end of each
accounting period or at any time the postings
are updated
PREPARING THE TRIAL BALANCE
List the account titles in numerical order;
Assets, Liabilities, Equity, Revenue, Expenses
Obtain the account balance of each account
from the general ledger and enter the debit
balances in the debit column and the credit
balances in the credit column
Add the debit and credit columns
Compare the totals
ADJUSTING PROCESS
Made in order to comply with the generally
accepted accounting principles regarding
revenue recognition and matching principles
Its use is necessary to make possible for one
to report on the income statement the
proper net income or loss for the period
ended, and to report on the Statement of
Financial Position the appropriate assets,
liabilities and Owner’s equity at the
statement date
26
ADJUSTING PROCESS
Accounting utilizes adjusting entries at the
end of an accounting period to split mixed
accounts. Mixed accounts are accounts that
have components of asset and expense, or
liability and income at the end of the
accounting period

27
ADJUSTING ENTRIES
Adjustments used to bring the assets,
liabilities, revenues and expenses up-do-date
at the end of the accounting period
Usually made at the end of the accounting
period in order for revenues to be
recognized within the period they are
earned, and for expenses to be recognized
within the period they are incurred

28
ADJUSTING ENTRIES
Basic adjusting entries
Accruals
Prepayments
Precollections
Depreciation and Amortization
Estimated Uncollectible accounts
Ending Inventory

29
ACCRUALS
Based on basic principles of accrual
accounting: Revenue Recognition Principle and
Expense Recognition Principle
Under accrual principle, income is recognized
as earned at the time service is rendered
regardless of when cash is collected and
expense is recognized as incurred at the time
service is received or used up regardless of
when cash is paid
Means to recognize (to accrue) revenue
earned regardless of when it is collected, and to
record expenses incurred whether paid or not
ACCRUALS
Accrued Revenue
Accruing revenue means bringing into
existence an income that is already earned but
not yet received
Income is brought to existence by recording
in the books of accounts the unrecorded
actual earnings during a given period in which
the business obtains legitimate claim over a
period of time

31
ACCRUALS
Accrued Revenue
Examples would be services performed but
not yet billed or collected, or accumulating
income due to passage of time as in the case
of rent income and interest income. Rent
income and Interest income are generally
unrecorded because their earnings do not
involve daily recording. However, at the end
of the period, they should be recorded to
avoid understatements of assets and revenue
32
ACCRUALS
Accrued Revenue
Accrued Revenue: bringing into existence an income
that is already earned but not yet received
Format of adjusting entry for accrued revenue
GENERAL JOURNAL
Date Page Number 1
2010 Descriptions PR Debit Credit
12/31 Accrued Interest Receivable xxxx
Interest Income xxxx
To recognize interest earned

 Observe that the adjustment for accrued revenue


increases both the asset and the revenue
accounts
ACCRUALS
Accrued Expense
Means recognizing an incurred and unrecorded
expense that remains unpaid because payment is
not yet due
Accrued expenses result from the same causes
as accrued revenue
An accrued expense of one company is accrued
revenue of another company

34
ACCRUALS
Accrued Expense
Adjustments for accrued expenses are necessary
to recognize the unrecorded expense that applies
to the current accounting period and to record
the unrecorded obligations that exist at the SFP
date
Adjustment increases both liability and expenses
Adjusting Entry
Salaries Expense
Accrued Salaries Payable
PREPAYMENTS
Asset Method of Prepayment
Original Entry
Prepaid Rent
Cash
Adjusting Entry
Rent Expense
Prepaid Rent

36
PREPAYMENTS
Expense Method of Prepayments
Original Entry
Rent Expense
Cash
Adjusting Entry
Prepaid Rent
Rent Expense

37
PRECOLLECTIONS
Advanced collections of business revenues
from customers
Liability Method
Original Entry
Cash
Unearned Interest Payable
Adjusting Entry
Unearned Interest Payable
Interest Income
38
PRECOLLECTIONS
Advanced collections of business revenues
from customers
Revenue Method
Original Entry
Cash
Interest Income
Adjusting Entry
Interest Income
Unearned Interest Payable
39
DEPRECIATION AND AMORTIZATION
Depreciation is the used or expired portion of
productive facilities such as building, furniture
and fixtures, and equipment which have been
recorded at their acquisition costs as capital
expenditures
Productive facilities are also called “property,
plant and equipment” or “fixed assets”
Adjusting entry
Depreciation Expense
Accumulated Depreciation – fixed asset account
DEPRECIATION AND AMORTIZATION
Method in computing depreciation
Straight line method
Annual depreciation expense =
(Acquisition cost - salvage value) / estimated
economic life in years

41
DEPRECIATION AND AMORTIZATION
Initial Journal Entry
01/01 Office Equipment 50,000
Cash 50,000

Invoice Price P47,000


Add: Incidental Cost
Installation cost P 2,000
Transportation cost 1,000 3,000
Total Acquisition cost P50,000

42
DEPRECIATION AND AMORTIZATION
Adjusting Journal Entry
12/31 Depreciation Expense 9,000
Accum Depr – Office Equipment 9,000

Total acquisition cost P 50,000


Less: Salvage value 5,000
Depreciable Cost 45,000
Divide by estimated economic life (yrs) 5
Annual Depreciation expense P 9,000

43
DEPRECIATION AND AMORTIZATION
Amortization is the allocation of the acquisition
costs of an intangible asset over its legal or
accounting estimated life
Intangible asset is an asset that has no physical
existence but provides the owner some selling
and operational advantages over competitors
Examples are goodwill, franchise, copyright,
patent and trade names
DEPRECIATION AND AMORTIZATION
Adjusting entry
Amortization expense
(Appropriate) Intangible asset Account

Formula for amortizing intangible assets


Annual amortization expense = acquisition cost
legal or accounting life
ESTIMATED UNCOLLECTIBLE ACCOUNTS
When accounts receivables are already long
overdue, some portion should be recorded as
“uncollectible accounts”, otherwise known as
“bad debts” or “doubtful accounts”
Direct write off method
Recording uncollectible accounts records bad
debts expense only when there is certainty that
the accounts receivable would become
worthless
ESTIMATED UNCOLLECTIBLE ACCOUNTS
Allowance method
For general-purpose reporting
Records bad debts expense even if the
uncollectibility is only estimated
Preferred method based on the matching
principle
ESTIMATED UNCOLLECTIBLE ACCOUNTS
Direct method
To record sales on account
Accounts Receivable
Sales
To record estimated amount uncollectible
no entry
To record actual amount ascertained to be
worthless
Bad Debts Expense
Accounts Receivable 48
ESTIMATED UNCOLLECTIBLE ACCOUNTS
Allowance method
To record sales on account
Accounts Receivable
Sales
To record estimated amount uncollectible
Bad Debts Expense
Allowance for Bad Debts
To record actual amount ascertained to be
worthless
Allowance for Bad Debts 49

Accounts Receivable
COMPUTATIONS USED IN ESTIMATING
DOUBTFUL ACCOUNTS UNDER THE
ALLOWANCE METHOD
Bad Debts as a Percentage of Sales page 290
Also called income statement approach since bad
debts expense is based on the sales made for the
period
Simple to apply and emphasizes matching of
expenses to revenues since bad debts is directly
related to sales
Gross sales is used if the returns, allowances and
discounts are not large in amount otherwise the
estimated doubtful accounts should be based on
sales
COMPUTATIONS USED IN ESTIMATING
DOUBTFUL ACCOUNTS UNDER THE
ALLOWANCE METHOD
Bad Debts as a Percentage of Accounts Receivable
page 292-293
Also called balance sheet approach
One disadvantage of the percentage of sales
method is that it does not show the net realizable
value of the receivables
3 Ways of estimating bad debts based on Accounts
Receivable
Increase the allowance by a certain percentage of the
receivables
COMPUTATIONS USED IN ESTIMATING
DOUBTFUL ACCOUNTS UNDER THE
ALLOWANCE METHOD
3 Ways of estimating bad debts based on Accounts
Receivable
Increase the allowance to a certain percentage of
accounts receivable
Aging of Accounts Receivable
• Not yet Due
• 1 – 30 days past due
• 31 – 60 days past due
• 61 – 90 days past due
• 91 – 180 days past due
• 181 – 360 days past due
MERCHANDISE INVENTORY, ENDING
BALANCE
Under Periodic Method of recording merchandise
the cost of sales is not determined every time
merchandise is handed over to a customer. After
making a physical count at the end of the accounting
period, this is recorded and deducted from total
goods available for sale to arrive at cost of sales.
Under the perpetual method, this is not recorded
anymore since the amount of unsold or on hand at
the end of the accounting period immediately
appears in the ledger as the balance of merchandise
inventory. However, this can be used to determine
inventory over or short
COMPARATIVE ENTRIES – PERIODIC AND
PERPETUAL SYSTEMS – Journal Entries
g) Number of units per count (end of year): 800 units
Periodic Inventory System Perpetual Inventory System
Merchandise Invty, End 40,000 Inventory Short/over 6,500
Income Summary 40,000 Merchandise Invty 6,500

Inventory short or over account is the account that


absorbs inventory shortage or overage resulting from
shrinkage, breakage, shoplifting, incorrect recording,
etc.
Eventually closed to the Cost of Goods Sold account
COMPARATIVE ENTRIES – PERIODIC AND
PERPETUAL SYSTEMS – Journal Entries
Computation of shortage:
Beginning Inventory P 50,000
Purchases 100,000
Freight in 2,000
Sales returns 500
Total P 152,500
Less: Cost of Sales P 105,000
Purchase returns 1,000 106,000

Merchandise per record (perpetual) P 46,500


Less: Merchandise per physical count 40,000

Shortage merchandise P 6,500


EXAMPLES ON ADJUSTING ENTRIES
Exercises 1-7 pp 317 to 320
WORKSHEET
Accountants often use worksheet to help
transfer data from the unadjusted trial balance
to the financial statements
This multi column document provides an
efficient way to summarize the data for financial
statements
The accountant generally prepares a worksheet
when it is time to adjust the accounts and
prepare financial statements.
WORKSHEET
Simplifies the adjusting and closing process
Can also reveal errors
Not part of the ledger or the journal, not is it a
financial statement. It is a summary device used
by the accountant for his convenience
PREPARING THE WORKSHEET
Steps 1 and 2: Headings and Unadjusted Trial
Balance
Headings
Name of the Company
Name of the Worksheet: Financial Statement
Worksheet
Date: For the Year Ended Month/Day/Year
Account Title
Taken from the general ledger
59
PREPARING THE WORKSHEET
Steps 1 and 2: Headings and Unadjusted Trial
Balance
Unadjusted Trial Balance
Amount also taken from the general ledger
Posted either on the debit or credit column
• Debit Column on Column #1
• Credit Column on Column #2
Totals double-underlined if debit and credit are
equal

60
PREPARING THE WORKSHEET
Steps 3 and 4: Adjustments and Adjusted Trial
Balance
Adjustment information is entered in the
adjustments column
Column #3 for Debit adjustment and Column #4
for Credit adjustment
An identification key letter is used to cross-
reference the debit and the credit adjustments
as they are entered in the adjustments columns.
PREPARING THE WORKSHEET
Steps 3 and 4: Adjustments and Adjusted Trial
Balance
In the event that the accounts to be debited or
credited are not listed in the beginning trial
balance, additional accounts, as needed, are
added at the bottom of the worksheet
PREPARING THE WORKSHEET
Steps 3 and 4: Adjustments and Adjusted Trial
Balance
Next, the information in the trial balance and
adjustments columns of the worksheet is
combined for each account in order to determine
the adjusted trial balance amounts.
In those accounts not affected by adjusting
entries, the same balance appearing in the initial
trial balance is transferred to the adjusted trial
balance columns
PREPARING THE WORKSHEET
Steps 3 and 4: Adjustments and Adjusted Trial
Balance
If the account in the trial balance has a debit
balance, the debit adjustments are added and the
credit adjustments are subtracted in calculating its
adjusted balance
If the account in the trial balance has a credit
balance, the credit adjustments are added and the
debit adjustments are subtracted in calculating its
adjusted balance
PREPARING THE WORKSHEET
Steps 3 and 4: Adjustments and Adjusted Trial
Balance
Add the balances and determine if debit and
credit are equal. When done, double underline
the debit and credit columns
PREPARING THE WORKSHEET
Steps 5 and 6: Completion of the Worksheet
Extend all the adjusted balance amounts to either the
income statement or the balance sheet columns
Assets, Liabilities and Owners’ Equity accounts are
transferred to the Statement of Financial Position
columns, while the revenue and expense accounts are
transferred to the income statement columns
Once all accounts are extended to the appropriate
financial statement columns, the worksheet is
completed by determining the net income or net loss
for the period.
PREPARING THE WORKSHEET
Steps 5 and 6: Completion of the Worksheet
Difference between the totals of the two income
statement columns and the two balance sheet columns
will represent the net income or net loss for the period.
Net income is indicated if the sum of the income
statement credit column (or revenues) is GREATER
than the sum of the income statement debit column
(or expenses).
Net loss is indicated if the sum of the income
statement credit column (or revenues) is LESSER than
the sum of the income statement debit column (or
expenses).
PREPARING THE WORKSHEET
Steps 5 and 6: Completion of the Worksheet
Net income or loss is entered in the column with the
smaller totals
Net income will be added to the total of the income
statement debit column and total of balance sheet
credit column
Net loss will appear as an addition to the income
statement credit column and to the balance sheet
debit column totals

68
FINANCIAL STATEMENTS FROM THE
WORKSHEET
The adjusted accounts as extended in the
Income Statement and SFP columns are
copied to contain the data of formal Income
Statement and Statement of Financial
Position

69
ESSENCE OF FINANCIAL STATEMENTS
Some questions that the owner of a business
periodically asks
How much did the business entity earn?
What is the financial condition of the business?
How much is the owners’ interest in the entity today?
What happened to the cash receipts?
Where did the cash go?
Financial statements are the means by which the
information accumulated and processed in financial
accounting is periodically communicated to the users
ESSENCE OF FINANCIAL STATEMENTS
Objective of financial statements is to provide
information about the financial position, financial
performance, and cash flows of an entity that is useful
to a wide range of users in making economic decisions.
COMPLETE SET OF FINANCIAL
STATEMENTS
Per Revised PAS No. 1, a complete set of financial
statements consist of the following:
Statement of Financial Position as at the end of the
period
Statement of comprehensive income for the period
Statement of changes in equity for the period
Statement of cash flows for the period
COMPLETE SET OF FINANCIAL
STATEMENTS
Per Revised PAS No. 1, a complete set of financial
statements consist of the following:
Notes, comprising a summary of significant
accounting policies and other explanatory information
Statement of financial position as at the beginning of
the earliest comparative period when an entity applies
an accounting policy retrospectively or makes a
retrospective restatement of items in its financial
statements or when it reclassifies items in its financial
statements
INCOME STATEMENT
Income statement for the period is normally
prepared first
Debit column contains all the expenses
while the credit column contains the revenue
accounts
If credit column total is greater than debit
column totals, there is income or gain
If credit column total is lesser than debit
column total, there is loss
Multi Step Form of Income Statement p 236
Function of Expense Form 237-238
STATEMENT OF CHANGES IN EQUITY
Also known as Statement of Capital p 300
Summarizes the changes that occurred in owners’
equity
In the case of sole proprietorships, increases in owners’
equity arise from additional investments by the owner
and profit during the period; decreases result from the
withdrawals of the owner and from loss for the period
Beginning balance and additional investments are
taken from the owner’s capital account in the general
ledger
Profit or loss figure comes directly from the income
statement while the withdrawals from the balance
sheet columns in the worksheet
STATEMENT OF FINANCIAL POSITION
Shows the financial position or condition of an entity by
listing the assets, liabilities and owners’ equity as at a
specific date; p 301
Users of financial statements analyze the SFP to
evaluate an entity’s liquidity, its financial flexibility and
its ability to generate profits and its solvency
Liquidity: availability of cash in the near future after taking
account of the financial commitments over this period
Financial flexibility: ability to take effective actions to alter
the amounts and timings of cash flows so that it can respond
to unexpected needs and opportunities
Solvency: availability of cash over the longer term to meet
financial commitments as they fall due
STATEMENT OF CASH FLOWS
Provides information about the cash receipts
and cash payments of an entity during a period
p 330
Formal statement that classifies cash receipts
(inflows) and cash payments (outflows) into
operating, investing and financing activities
Cash Flows from Operating Activities
Operating activities generally involve providing
services, and producing and delivering goods
STATEMENT OF CASH FLOWS
Cash Flows from Operating Activities
Cash flows from operating activities are
generally the cash effects of transactions
and other events that enter into the
determination of profit or loss.
Direct method: obtained by adding the
individual operating cash inflows and then
subtracting the individual operating cash
outflows p 330
STATEMENT OF CASH FLOWS
Operating cash flows using the direct method:
Cash Inflows
Receipts from sale of goods and performance of services
Receipts from royalties, fees, commissions and other
revenues
Cash Outflows
Payments to suppliers of goods and services
Payments to employees
Payments for taxes
Payments for interest expense
Payments for other operating expenses
STATEMENT OF CASH FLOWS
Indirect method:
obtained by adjusting profit for income and expense
items not resulting from cash transactions.
Adjustment begins with profit followed by the
addition of expenses and charges that did not entail
cash payments
Increases in current assets and decreases in current
liabilities involved in the determination of profit but
which did not actually increase or decrease cash are
subtracted from profit
Decreases in current assets and increases in current
liabilities are added to profit to obtain net cash
provided by operating activities
STATEMENT OF CASH FLOWS
Cash Flows from Investing Activities
Investing activities include making and collecting loans,
acquiring and disposing of investments in debt or equity
securities and obtaining and selling of property and
equipment and other productive assets
Cash Inflows
Receipts from sale of property and equipment
Receipts from sale of investments in debt or equity securities
Receipts from collections on notes receivable
Cash Outflows
Payments to acquire property and equipment
Payments to acquire debt or equity securities
Payments to make loans to others generally in the form of
notes receivables
STATEMENT OF CASH FLOWS
Cash Flows from Financing Activities
Financing activities include obtaining resources
from owners and creditors
Cash Inflows
Receipts from investments by owners
Receipts from issuance of notes payable
Cash Outflows
Payments to owners in the form of withdrawals
Payments to settle notes payable
RELATIONSHIP AMONG FINANCIAL
STATEMENTS
Income statement reports all income and expenses during
the period. The profit or loss is the final figure in this
statement
Statement of Changes in Equity considers the profit or loss
figure from the income statement as one of the determining
factors that explains the change in owner’s equity
Balance Sheet reports the ending owner’s equity taken
directly from the Statement of Changes in Equity
Statement of Changes in Cash Flows reports the net
increase or decrease in cash during the period and ends with
the cash balance reported in the balance sheet. This
statement is prepared based on information from the
income statement and the balance sheet
JOURNALIZING AND POSTING CLOSING
ENTRIES
After adjustments are recorded in the general
journal and posted in the general ledger, the
open accounts of the revenue and expense
accounts should be closed to the capital
account at the end of the accounting period.
JOURNALIZING AND POSTING CLOSING
ENTRIES
Nature of Closing Entries
Closing entries are journal entries that bring
temporary accounts to zero balance and transfer
their balances to the permanent capital account
Recorded in the general journal
At the end of the accounting period, after
effecting the correcting and/or adjusting entries,
accountants close all nominal and temporary
accounts in order to prevent the mixing of
revenues, expenses and withdrawal accounts of
one period to the next accounting period
JOURNALIZING AND POSTING CLOSING
ENTRIES
Nature of Closing Entries
Temporary or nominal accounts are used to
effect accounting periodicity principle
Called temporary accounts because they are
only used within one accounting period and their
related amounts are not to be carried forward to
the next accounting period
If will be used in the succeeding period, they
are usually recorded based on new related
transactions
JOURNALIZING AND POSTING CLOSING
ENTRIES
Nature of Closing Entries
Temporary accounts include all income
statement accounts (revenues and expenses)
and withdrawal accounts (owner’s drawing)
Permanent accounts carry forward their ending
balances to the next accounting period. These
accounts are known as “real accounts” because
of their continuing nature. They comprise items
in the SFP
THE INCOME SUMMARY ACCOUNT
Used as a temporary account in which the revenue and
expense accounts are initially closed to determine
whether the business operations resulted to income or
loss
Also known as “Revenue and Expense Summary”
Difference of income summary account representing
the revenue accounts and the expense accounts may
represent either the net income or net loss for a given
period
Net income if the Income Summary Account representing
revenues is greater than the income summary account
representing expenses
Finally closed to the Owners’ Capital account as Income
Summary account is also a temporary account
PROCEDURES IN CLOSING THE
ACCOUNTS
To close revenue accounts p 302
Debit all revenue accounts with their respective
adjusted balances, and credit the Income
Summary Account for the total revenues
PROCEDURES IN CLOSING THE
ACCOUNTS
To close expense accounts
Debit the income summary account for the
total expenses and credit all expense accounts
with their adjusted ending balance
PROCEDURES IN CLOSING THE
ACCOUNTS
To close net income
Debit income summary account and credit the
owner’s capital account. There is net income if
balance of the Income Summary Account is a credit
balance
PROCEDURES IN CLOSING THE
ACCOUNTS
To close net loss
Credit the income summary account and
debit the owner’s capital account. There is
net loss if the net balance of income
summary is a debit balance
PROCEDURES IN CLOSING THE
ACCOUNTS
To close owner’s withdrawals
Debit the Owner’s Capital account and
credit the Owner’s Drawing account
CLOSING THE BEGINNING INVENTORY
ACCOUNT (PERPETUAL INVTY SYSTEM)
Beginning merchandise inventory should be closed
at the end of the accounting period even if it is a
SFP account of the previous accounting period
Because the beginning merchandise inventories
are the first items sold in the current period