Group Activity

Determine the effects or recording each of the six types of adjusting entries on the accounting
equation. Use (1) for Increase, (D) for Decrease, and (N/E) for No Effect.
Assets = Liabilities + Equity
1. Depreciation ___ _______ ___
2. Prepaid Expense ___ ______ ___
3. Accrued Expense ___ ______ ___
4. Deferred revenues ___ ______ ___
5. Accrued Revenues ___ ______ ___

Adjusted Trial Balance

After all the adjusting entries are made, the adjusted trial balance can now be prepared. This is done
by updating the balances of the items from the unadjusted trial balance, and applicable, add items
that came only after the preparation of the adjusting entries. The adjusted trial balance is simply the
unadjusted trial balance plus the effects of the adjusting entries.

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Financial Statements
In financial reporting, there are several financial statements which serve different purposes. Some of
which are: income statement, balance sheet, statement of cash flows, statement of changes in equity,
among others. For the purposes of this chapter, the income statement and the balance sheet would
be illustrated using the Matalino Dormitory example.
Income Statement
The first financial statement to be prepared is the income statement. The simplified presentation of
the income statement should follow the following format:
Name of Company
Income Statement
Period Ended December 31, 20XX
Revenue XXX
Expenses XXX
Other Gains and Losses XXX
Net Income XXX

The income statement basically contains all the nominal accounts, except the drawing accounts and
the income summary account.

Matalino Dormitory's income statement is as follows:

Matalino Dormitory
Income Statement
For the Year Ended December 3, 2015

Rent Revenue 360,000

Salaries and Wages Expense (258 875.00)
Depreciation Expense (646 845.00)
Office Supplies Expense (5.000.00)
Utilities Expense (376 941.89)
Insurance Expense (12 000.00)
Net income ( 939 661.89)

Balance Sheet
Also known as the statement of financial position, the balance sheet provides the amounts
for the various assets, liabilities, and owner's capital accounts. The assets are presented first,
followed by the liabilities and equity. To show that the accounting equation is satisfied, the total assets
and the total liabilities and owner's capital should be highlighted to be of equal amount.
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The following is the recommended format:

Name of Company
Balance Sheet
As of December 31, 20XX
Asset 1 Liability 1
Asset 2 Liability 2
Asset 3 Total Liabilities
Asset 4
Asset 5 Owner's Capital
Total assets Total liabilities and owners Capital
 Owner's Capital
Notice that in the last line of the heading of the balance sheet, the phrase "for the period ended" is
used. This is because the income statement is the result of operations on an entity for a particular
period. Meanwhile, in the heading of the balance sheet, the phrase "as of is used because what is
shown are the amounts of assets, liabilities, and owner's capital at a certain point in time. Usually, the
assets and liabilities are presented according to their liquidity. Cash, being the most liquid asset, is
presented first, followed by receivables, inventories, and PPE accounts. Basically, the shorter the time
an asset is expected to be converted into cash, the more liquid it is, and this is the reason why cash is
presented first. The same is followed in the presentation of liabilities. Those liabilities expected to be
paid first are presented before those that will be paid later.

The following is the balance sheet of Matalino Dormitory:

Matalino Dormitory Balance Sheet

As of December 31, 2015

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The owner's capital is determined as follows:

Owner's Capital Balance from 8 994 270.00
the adjusted trial Balance

Net Loss from the Income Statement (939 661.89)

Owner's Drawings from 10 000.00
the Adjusted Trial Balance
Owner's Capital, December 31,2015 80 44.608.11

Closing Entries
From the adjusted trial balance, closing entries are to be made. By making closing entries, all
nominal or temporary accounts are closed out to the owner's capital account, through the income
summary account. Closing entries reduce the balances of the temporary accounts to zero to prepare
them for accumulating amounts for another accounting period. The following pro-forma journal entries
should be made
Dr. Revenues
Cr. Income Summary
To close revenue accounts

Dr. Income Summary

Cr. Expenses
To close expense accounts

Dr. Income Summary

Cr. Owner's Capital
To close income summary account if there is a net income
 Or
Dr. Owner's Capital
Cr. Income Summary
To close income summary account if there is a net loss

Dr. Owner's Capital

Cr. Owner's Drawings
To close the drawings account

The first two entries effectively close out all income statements accounts to the income summary
account. After making the first two entries, the balance of the income summary account is either a
credit or a debit, and should be equal to the amount of net income or loss, respectively. The third
entry closes out the income summary account to the owner's capital if there is a net income. The
fourth entry closes out the income summary account to the owner's capital if there is a net loss. The
fifth entry closes the owner's drawings to the owner's capital. It should be noted that although there is
an outflow of resources in owner's drawings, it is not included in the income statement since it is
purely a transaction with the owner.
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Individual Activity
Determine the missing amounts in the following closing entries for Matalino dormitory: Dr. Rent
Revenue _________
Cr. Income Summary _______
To close the revenue account

Dr. Income Summary ______

Cr. Salaries and Wages Expense ____
Cr. Depreciation Expense ____
Cr. Office Supplies Expense ____
Cr. Utilities Expense ____
Cr. Insurance Expense ____
To close expense accounts

Dr. Owner's Capital

Cr. Income Summary ________
Owner's Capital _______

Dr. Owner's Capital _________

Cr. Owner's Drawings _______
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The post-closing trial balance proves the equality of debits and preparation of closing entries.
Group Activity
Preparation of Financial Statements and Closing Entries
Are you ready to test your understanding on adjusting and closing entries and financial statement
preparation? Before answering the theory and computation questions found at the end of this chapter,
try to answer this sample. After journalizing the entries as done in Chapter 10, the following is the
unadjusted trial balance:

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Adjusting Entries Interest Expense. An interest charge of 7.25% is to be accrued for the two months
starting from the date of acquisition up to year-end, on the 680 000 loans payable from the purchase
of company car on credit. Interest expense is computed, and the corresponding adjusting entry, as
follows:
680 000 x 7.25% x 2/12=8216.67
Dr. Interest Expense 8 216.67
Cr. Interest Payable 8 216.67
Supplies. Inventory count at year-end reveals the following supplies left: 1 320 worth of office
supplies; 2 140 worth of repair supplies; 120 worth of air fresheners. The following adjusting entries
should be made for the aforementioned supplies:
Dr. Office Supplies Expense 8 996 50 Dr. Maintenance and Repairs Expense 11.060
Cr. Office Supplies Inventory 8 996 50
Cr. Repair Supplies Inventory 5 360
Cr. Car Supplies Inventory 5700

Service Revenue. Gross receipts amounting to 89 310.75 were collected by the drivers during the
last day of the year. Since celebrations are expected to start early evening. they are told to remit their
receipts, net of commissions of 4 465.54, during the next working day of the following year. Hence,
the following entry is made:
Dr. Receivable from Employees 84 845.21
Dr. Salaries,Wages and 4465 54
Bonuses Expense
Cr. Service Revenue 89 310.75

Depreciation. Experise for the depreciation of various components of PPE should be booked.
Although one depreciation expense account may be used for the combined amounts, separate
accumulated depreciation accounts should be charged for each class of PPE. The following is the
computation of the depreciation expense for each class, and thereafter, the adjusting entry.
 Taxicab -[(4 320 000 less 1 000 000)/5 years) x 3/12 = 166 000
Each taxicab has a residual value of 200 000 at the end of five years, hence the 1 000 000 deduction
to get the depreciation.
Company Car-[(680 000 less 250 000)/5 years) x 2/12-14 333.33

Same as the taxicabs, the company car has a five year useful life, except that the residual value is
250 000. Notice that 2/12 is multiplied to get the depreciation expense because for the current year, it
has only been two months from the time the company car was purchased and put into use. For the
other cases, the multiplier depends on the number of months of usage.
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Office Equipment (32 000/5 years×3/12=1600

Radio Communication System-(12 500/5 years) x 3/12=625
For both the office equipment and the radio communication system, the useful life is five years, but no
residual value.
Adjusting Entry:
182 558.33
Dr. Depreciation Expense 182 558.33
Cr. Accumulated Depreciation 166 000
Taxicab
Cr. Accumulated Depreciation - Company Car 14 333.33
Cr.Accumulated Depreciation - Office Equipment 1 600
Cr. Accumulated Depreciation-Radio 625
Communication System .

5. Prepaid Rent. The 40 000 amount of prepaid rent on the unadjusted trial balance pertains to rent
paid for December of the current year and January of next year. Since the amount pertaining to the
last month of the current year is deemed expired, the following adjusting entry is necessary:

Dr. Rent Expense 20 000

Cr. Prepaid Rent 20 000

Utilities. Since the bills for utilities are only received at the sixth day of the succeeding month, no
utilities expense for the month of December has been recorded. It has been determined that the total
utilities for December amount to 8 355.90, therefore necessitating the following adjusting entry:

Dr. Utilities Expense 8355.90

Cr. Utilities Payable 8 355.90

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Requirements:
1. Prepare the income statement.
2. Prepare the balance sheet.
3. Prepare the closing entries.
4. Prepare the post-closing trial balance

Chapter Summary
Adjusting entries are prepared at the end of an accounting period to unrecorded revenue that has
been earned and unrecorded expenses that have been incurred during the accounting period.

Each adjusting entry has the following characteristics: (1) each entry is recorded at the end of an
accounting period; (2) each entry has at least one balance sheet account (eg, asset or liability) and at
least one income statement account (eg, revenue or expense); and (3) each entry has no cash
account in either the debit or the credit side.

In the accounting process of a service firm, there are six classifications of adjusting entries:
depreciation, bad debts, prepaid expenses, accrued expenses, deferred revenues, and accrued
revenues.
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The adjusted trial balance is simply the unadjusted trial balance plus the effects of the adjusting
entries. Closing entries reduce the balances of the temporary accounts to zero to prepare them for
accumulating amounts for another accounting period. The post-closing trial balance proves the
equality of debits and credits after the preparation of closing entries The accounting cycle is as
follows:

Analysis of business transactions

Journalizing transactions
Posting transactions to ledger accounts
Trial Balance
Adjusting entries
Adjusted trial balance
Preparation of financial statements
Closing entries
Post-closing trial balance

Discussion
Questions 1. What is the first step in the summarizing phase of the accounting process?
2. From what document/s is the trial balance prepared from?
3. Give the nature of adjusting entries.
4. Differentiate adjusted from unadjusted trial balance.
5. What are the different types of adjusting entries?
6. What are the different financial statements? 7. Which financial statement is prepared first? 8. What
are closing entries and what purpose do they serve?
9. Give the different closing entries.
10. Give the primary difference/s between an income statement and a balance sheet.
11. What is the end figure in the income statement?
12. In the balance sheet, what totals need to be equal?
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Summative Assessment
Multiple Choice. Read and analyze each item. Circle the letter of the best answer.
1. Which of the following is NOT a step in the summarizing phase of the accounting process? a.
b. Preparation of the adjusted trial balance Preparation of adjusting entries
c. Analyzing business transactions
d. Preparation of closing entries
2. Which is NOT a type of adjusting entry? a.Unearned revenues
b. Accrued expenses
c.Prepaid expenses
d. Unearned expenses
3. Which of the following entries is a proper adjusting entry?
a.Debit Cash and Credit Revenue
b. Debit Revenue and Credit Unearned Revenue
c.Debit Expense and Debit Payable
d. Debit Expense and Credit Payable

4.Which of the following statements is true about depreciation?

a.Using the straight-line method of depreciation, equal amounts would be recognized as depreciation
expense across the useful life of the asset, unless other estimates change.
b. The residual value of a PPE increases the amount to be charged to depreciation.
c. Land is always depreciated using the straight-line method.
d. The depreciation expense represents the unexpired portion of the cost of a PPE
5. The trial balance is prepared from which accounting document?
a.Journal
b. Journal voucher
c. Ledger
d. Ledger voucher

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