Recording Business Transactions

(Double-Entry System)
The Double-Entry System of Recording Transactions
Recording transactions in accounting is based on the double-entry system. The transaction has a dual
effect which means that every transaction affects at least two accounts. For every debit, there is a corresponding
credit. The total amount of the accounts debited must equal the total amount of the accounts credited.
The Accounting Cycle
The life of a business is divided into accounting periods of equal length. A standard sequence of
accounting procedures is repeated for each period. These uniform procedures done to accomplish the accounting
process are referred to as the accounting cycle.
1. Identifying and analyzing the events to be recorded

This is the process of identifying and analyzing the transactions to be recorded through the
business documents. Business documents are forms containing evidence to support a business
transaction. These documents provide the data concerning the parties involved in the transaction,
the exchange made, the date, and the money value of the exchange. In determining the exchange
made, the value received by the business and the value parted are translated into their debit and
credit components.

2. Recording transactions in the journal

This is known as journalizing. It is the process of recording the transaction in the first book of
account known as the journal.

3. Posting journal entries to the ledger

This is known as posting. It is the process of transferring the information found in the journal into
the book of final entry known as the ledger. The ledger summarizes the increases or decreases of
individual accounts.

4. Preparing the trial balance

The trial balance is a list of accounts found in the ledger together with the account’s balance or
total. This is a proof that for every debit, there is a corresponding credit. Hence, it is also
a proof that the ledger is in balance.

5. Preparing the worksheet and adjusting entries

The worksheet is a common tool used by accountants to assemble on a sheet of paper all the
information needed to prepare the financial statements, adjusting entries, closing entries and the
post-closing trial balance

6. Preparing the financial statements

A balance sheet, income statement, statement of changes in equity, and a cash flow statement are
prepared to provide useful information to parties interested in the financial information of the
business.

10
 7. Journalizing and posting of adjusting journal entries

Adjusting entries are prepared at the end of the accounting period to update the accounts for
internal transactions because they affect more than one accounting period. This will record the
accruals, expiration of deferrals, estimation, and other events from the worksheet.

8. Journalizing and posting of closing journal entries

Closing entries are prepared at the end of the accounting period to update the owner’s capital
account. This will also eliminate the balances of the nominal accounts so that they may be ready
for the next period.

9. Preparing the post-closing trial balance

After the closing entries have been posted, the post-closing trial balance is prepared from the
general ledger accounts. This is necessary to assure that these entries have been correctly posted.
This will also check the equality of the debits and credits after the closing entries.

10. Journalizing and posting of reversing journal entries

Reversing entries are prepared to simplify the accounting process. The adjusting entries are
simply reversed on the first day of the accounting period. Not all adjusting entries are reversed,
only accruals and deferrals that use the nominal accounts.

The Analysis of Transaction

Following are the steps involved to analyze transactions:
1. From the business document, determine the kind of transaction or exchange made.
2. Analyze the transaction to determine the accounts affected. They can either affect the assets, liabilities,
owner’s equity, and revenue or expenses accounts.
3. Determine the effect of the transactions on the accounts affected. The transaction can either increase or
decrease the accounts.
4. Apply the rules of debit and credit to identify whether the accounts affected should be debited or credited
to show the corresponding increase or decrease.
The Journal
The Journal is a chronological record of events or business transactions showing all the effects of each
transaction in terms of debits and credits. Because transactions are initially recorded in the journal, it is called the
book of original entry. The simplest journal is the general journal.
A Journal entry should contain the following:
1. Date – Write the month on the first transaction unless there is a change in month for the succeeding
transactions or a new page is used.
2. Account Titles and Explanation – Write the debit account at the extreme left of the first line while the
credit account is indented half-inch on the next line. The explanation describing the transaction is written
on the extreme left of the next line below the credit. Remember to skip one line before proceeding to the
next transaction.
3. P.R. (Posting Reference) – Write the corresponding account number here once the entry is posted.
Meanwhile, it is left blank until the posting has been done.
4. Debit – Under this column, write the debit amount for each debit account.
5. Credit – Under this column, write the credit amount for each credit account.

11
The Simple and Compound Entry
When only two accounts are affected, we call this a simple entry where there is only one debit account
and one credit account. In some cases, a transaction would require the use of three or more accounts in which case
the entry is a called a compound entry.
Journalizing the Transactions
Journalizing is the process of recording transaction in the journal after it has been recognized and
measured. In journalizing transactions, the double entry system is used. In this case, two or more accounts are
affected by each transaction. It follows that for every debit, a corresponding credit is made. The total debits
should equal total debits for every transaction. In this way, the equality of the accounting equation is maintained.

Rules for Debit and Credit

You debit to show: You credit to show:
1. Increase in assets. 1. Decrease in assets
2. Decrease in liabilities 2. Increase in liabilities
3. Decrease in owner’s equity 3. Increase in owner’s equity
- Owner’s Withdrawal - Initial Investment
- Expenses - Additional Investment
- Revenue/Income

Illustrative Problem
Initial Investment
The following are transactions for JC Intal Meat Shop for the month of September. They will be recorded
using the double entry system. To analyze each transaction, the following shall be used to show the effect on the
accounts as follows: A (For Asset), L (For Liability) or OE (For Owner’s Equity). The effects on the owner’s
equity is sub-classified as follows: OE:R (Revenue) and OE:E (Expenses).
August 1 Erica Balidoy is a meat shop owner. She is following in a long line of butchers, seeing as his Dad
and Grandfather. She invested P 1,000,000 in this initial endeavor.
Analysis Assets Increased. Owner’s Equity Increased.
Rules Debit increases in assets. Credit increases in owner’s equity.
Entry Increase in assets is recorded by a debit to cash. Increase in owner’s equity is recorded by a credit
to Ong Capital.
Dr Cr
Cash (A) 1,000,000
Balidoy, Capital (OE) 1,000,000
Initial Investment
Acquisition of Transportation Equipment for Cash
August 1 Acquired transportation equipment to be used for delivery, P 300,000 cash.
Analysis An asset increased. Another asset decreased.
Rules Debit increases in assets. Credit decreases in assets.
Entry Increase in assets is recorded by a debit to transportation equipment. Decrease in assets is
recorded by a credit to cash.
Dr. Cr.
Transportation Equipment (A) 300,000
Cash (A) 300,000
Purchased transportation equipment for cash

12
Advance Payment of Rental
August 1 Rented office space and paid two months’ rent in a advance, P30,000.
Analysis An asset increased. Another asset decreased.
Rules Debit increases in assets. Credit decreases in assets.
Entry Increase in assets is recorded by a debit to prepaid rent. Decrease in assets is recorded by a credit
to cash.
Dr Cr
Prepaid Rent (A) 30,000
Cash (A) 30,000
Paid two months’ rent in advance
Issuance of Note for Cash
August 2 Erica Balidoy issued a promissory note for a P200,000 loan from Metro Bank. The note carries a
12% interest per annum. The interest and the principal are payable after one year.
Analysis Asset increased. Liabilities increased.
Rules Debit increases in assets. Credit increases in liabilities.
Entry Increase in assets is recorded by a debit to cash. Increase in liabilities is recorded by a credit to
notes payable.
Dr Cr.
Cash (A) 200,000
Notes Payable (L) 200,000

Borrowed money from the bank issuing a promissory note

Events not affecting the Accounting Equation (no journal entry)
August 3 Hired a cashier with P5000 monthly salary. The cashier started work on the same day.
There is no entry necessary at this point as the hiring of the secretary has no effect in the assets,
liabilities and owner’s equity.

Acquisition of Office Equipment paying down payment and the balance on account.
August 5 Acquired equipment from Valix’s for P50,000, paying P20,000 and the balance at the end of the
month. Note: A compound entry is needed in this transaction.
Analysis Assets increased. Assets decreased. Liabilities increased.
Rules Debit increased in assets. Credit decreases in assets. Credit increases in liabilities.
Entry Increase in assets is recorded by a debit to office equipment. Decrease in assets is recorded by a
credit to cash. Increase in liabilities is recorded by a credit to Accounts Payable.
Dr Cr
Office Equipment (A) 50,000
Cash (A) 20,000
Accounts Payable (L) 30,000
Bought office equipment paying cash and the balance on account.
Payment of Salaries
August 15 Paid cashier’s salary for half month, P2,500.
Analysis Assets decreased. Owner’s equity decreased.
Rules Debit decreases in owner’s equity. Credit decreases in assets.
Entry Decrease in owner’s equity is recorded by a debit to salaries expense. Decrease in assets is
recorded by a credit to cash.
Dr Cr.
Salaries Expense (OE:E) 2,500
Cash (A) 2,500

13
 Paid for cashier’s half month salary.

Income Earned on Account

August 22 Delivered and billed Mr. Nasane P25,000 for a delivery of meat.
Analysis Assets increased. Owner’s equity increased.
Rules Debit increases in assets. Credit increases in owner’s equity
Entry Increase in assets is recorded by a debit to accounts receivable. Increases in owner’s equity is
recorded by a credit to delivery revenues.
Dr Cr
Accounts Receivable (A) 25,000
Delivery Revenues (OE:R) 25,000
Delivery of meats on account

Cash Withdrawal by Owner for Personal Use

August 22 Erica Balidoy withdrew P30,000 for personal use.
Analysis Assets decreased. Owner’s equity decreased.
Rules Debit decreases in owner’s equity. Credit decreases in assets.

Entry Decrease in owner’s equity is recorded by a debit to Balidoy, Drawing. Decrease in assets is
recorded by a credit to cash.
Dr. Cr
Balidoy, Drawing (OE) 30,000
Cash (A) 30,000
Erica Balidoy withdrew cash for personal use.

Unpaid Expense already Consumed / Incurred (Accrued Expenses)

August 24 Received bill from SMART, P1500
Analysis Liabilities increased. Owner’s Equity decreased.
Rules Debit decreases in owner’s equity. Credit increases in liabilities.
Entry Decrease in owner’s equity is recorded by a debit to utilities expense. Decrease in assets is
recorded by a credit to cash.
Dr. Cr
Utilities Expense (OE:E) 1,500
Utilities Payable 1,500
Received bill from SMART
Partial Collection of Accounts Receivable
August 26 Received P10,000 from Mr. Nasane as partial payment for delivery of meats delivered last
August 22.
Analysis Asset increased. Another Asset decreased.
Rules Debit increases in assets. Credit decreases in assets.
Entry Increase in assets is recorded by a debit to cash. Decrease in assets is recorded by a credit to
accounts receivable.
Dr. Cr.
Cash (A) 10,000
Accounts Receivable (A) 10,000
Received cash as partial collection from Mr. Nasane

14
Use of T-Accounts
An Account is a form of record that summarizes the increases or decreases of any specific
accounting value. The simplest form of an account is the T-Account because the accounting
equation is represented by a big T. It is an informal tool used to analyze the effect of a transaction
in the assets, liabilities, owner’s equity, revenue and expenses.
The Three Elements of an account are:
1. Account Title
2. Debit
3. Credit
The T-Account and the rules of debit and credit
Account Title
Debit Credit
1. Increase in Asset 1. Decrease in Asset
2. Decrease in Liability 2. Increase in Liability
3. Decrease in Owner’s Equity 3. Increase in Owner’s Equity
(Withdrawals & Expenses) (Investment, Revenue/Income)

The Ledger
The Ledger is a group of the accounts used by the company. It is the book of final entry. An Account is
an accounting device or form of record that summarizes the increases or decreases of any specific accounting
value. The accounts in the general ledger are classified into two general groups :
1. Balance sheet or real accounts (Assets, Liabilities and Owner’s Equity)
2. Income statement or nominal accounts (Revenue and Expenses)
The Ledger has a record of each account. The T-Account is the basic format used to record every account
while the journal is chronologically arranged by date, the ledger is organized by account.

Chart of Accounts
Chart of Accounts is a list of all account titles used by the company with their corresponding account
numbers. Account titles are arranged in financial statement order. Balance sheet accounts which include assets,
liabilities and owner’s equity come first. Account titles in the income statement which include revenue and
expenses follow. The accounts are so numbered for purposes of indexing and cross-referencing.

Erica Balidoy Meat Shop

Chart Of Accounts
Balance Sheet Accounts
Assets Liabilities
110 Cash 210 Accounts Payable
120 Accounts Receivable 220 Notes Payable
130 Prepaid Rent 230 Utilities Payable
140 Transportation Equipment
170 Office Equipment
Owner’s Equity
310 Balidoy, Capital
320 Balidoy, Drawing
330 Income Summary

15
Income Statement Accounts
Income Expenses
410 Delivery Revenues 510 Salaries Expense
520 Utilities Expense

The Normal Balance of an Account

The side of an account where increases are recorded is referred to as the normal balance of an account.
This can be the left side (debit) or the right side (credit). The reason for this is account increases usually exceed
account decreases. The following are normal balances of accounts:
Normal Debit Balance Normal Credit Balance
Asset Liability
Owner’s Drawing Owner’s Equity
Expense Income

Posting to the Ledger

Posting is the process of transferring information from the journal to the ledger. Debits in the journal are
correspondingly posted as debits in the ledger, and credits in the journal are likewise posted as credits in the
ledger. The steps in posting are as follows:
1. From the journal, copy the date of the transaction to the ledger.
2. Under the journal reference (J.R) column of the ledger, copy the page number of the journal.

3. Under the debit column in the ledger, transfer the debit amount from the journal. Under the credit
column in the ledger, transfer the credit amount from the journal.
4. After posting the amount to the ledger, write the account number in the posting reference (P.R.)
column of the journal.
General Journal
Date Account Titles P.R. Debit Credit
and Explanation
2016
Aug. 1 Cash 110 1,000,000
Balidoy, Capital 310 1,000,000
Initial Investment

General Ledger
Account: Cash Account No.110
Date Explanation J.R. Debit Credit Balance
2016
Aug. 1 J-1 1,000,000 1,000,000

Account: Balidoy, Capital

Date Explanation J.R. Debit Credit Balance
2016
Aug. 1 J-1 1,000,000 1,000,000

The Ledger Accounts after Posting

The Debit or Credit balance of each account is determined at the end of the accounting period in order to
prepare the trial balance. The debit column and the credit column of each account are added to get the balance of

16
each account. If an account’s total debit exceeds total credit, the account has a debit balance. If the total credit
exceeds the total debit, the account has a credit balance.

The Trial Balance

The trial balance is the schedule of all balances to prove the equality of the debit and credit. It is a listing
of all account titles with their respective debit or credit balances taken from the ledger. However, it does not
check or vouch the accuracy of the report.
The following are the steps in the preparation of the trial balance.
1. In their proper numerical order, make a listing of all account titles.
2. Get the account balance of each ledger account and write them under their corresponding debit or
credit column.
3. Put or add the debit and the credit columns of the trial balance.
4. Check whether the debit totals and credit totals are equal. They must be equal, otherwise your trial
balance has error.

Possible Errors in the Trial Balance

1. Transposition – this error occurs when order of two numbers are reversed.
Ex. 48 was erroneously written as 84
1234 was erroneously written as 4321
2. Transplacement or Slide – this occurs when a decimal point has been moved or misplaced.
Ex. 100 was erroneously written as 10
67.89 was erroneously written as 678.9
Note: In both cases, the discrepancy between the two columns of the trial balance is divisible by 9.

Adjusting Entries
In the process of preparing financial statements, the economic life of the business is divided into time
periods. Periodicity concept requires that revenues and expenses are to be reported in the proper period. In
determining the proper period, accountants use generally accepted accounting principles (GAAP) which requires
the accrual basis of accounting.

Under the accrual basis of accounting, revenues are reported on the income statement in the period in
which they are earned. For example, when services are performed to the customers, revenue is reported even if
cash may or may not be received during the period. The accounting principle that supports this reporting of
revenues is called the revenue recognition principle.

On the other hand, expenses are reported in the same period as the revenues to which they relate. The
accounting principle supporting reporting revenues and related expenses in the same period is called the
matching principle. By matching revenues and expenses, net income or loss for the period is properly reported
on the income statement.

ADJUSTING PROCESS

At the end of the accounting period, many of the account balances in the ledger are reported in the
financial statements without change. Some accounts, however, require updating for the following reasons:

1. Some expenses are not recorded daily.

Example: day-to-day use of supplies

17
 2. Some revenues and expenses are incurred as time passes by.
Example: rent received in advance; payment of prepaid insurance
3. Some revenues and expenses may be unrecorded.
Example: unbilled revenues; unpaid salaries

The analysis and updating of accounts at the end of the period before the financial statements are prepared
is called the adjusting process. The journal entries that bring the accounts up to date at the end of the accounting
period are called adjusting entries.

All adjusting entries affect at least one income statement account and one balance sheet account. Thus, an
adjusting entry will always involve a revenue or an expense account and an asset or a liability account.

TYPES OF ACCOUNTS REQUIRING ADJUSTMENT

Five basic types of accounts require adjusting entries as shown below.
1. Prepaid expenses – expense already paid in advance but not yet incurred
2. Unearned revenue – revenue already collected in advance but not yet earned
3. Accrued revenue – revenue already earned but not yet collected
4. Accrued expense – expense already incurred but not yet paid
5. Depreciation - allocated portion of the cost of an entity’s fixed assets

Prepaid Expenses

Transaction Advance payment of cash for a future expense

Prepaid Expense xx
Journal Entry Cash xx
Expense paid in advance

Accounting Assets = Liabilities + Owner’s Equity

Equation Cash
xx

Prepaid Expense `
xx

AnCash paid in
alyadvance for a
sisfuture expense
is recorded as
asset. The
transaction is
recorded by
debiting
prepaid
expense
account and
crediting cash
account.

18
 Adjustment End-of-period adjustment to update the prepaid expense account

Expense xx
Journal Entry Prepaid Expense xx
Adjustment for prepaid expense

Assets = Liabilities + Owner’s Equity

Accounting
Equation Prepaid Expense Expense
xx xx

Analysis The prepaid expense account is decreased by crediting the amount of the prepaid
expense that has expired or has been used, and the related expense account is increased
by debiting.

Supplies. The Supplies account has a debit of ₱2,000. A count of supplies at the end of the period reveals that
₱760 is on hand.

Dec. 31 Supplies Expense 1,240

Journal Entry Supplies 1,240
(Adjustment) To record supplies used

Assets = Liabilities + Owner’s Equity

Accounting
Equation Supplies Supplies Expense
2,00 Dec 1,240 Dec 1,24
Bal.
0 31 31 0
Adj. 760
Bal.

The balance on December 31 of supplies account is P2,000. Supplies were used during December, and
some are still on hand and not used. Hence, the amount to be transferred from the asset account to the expense
account on December 31 is P1,240, computed as follows:

Supplies available during December (balance on account) P 2,000

Supplies on hand 760
Supplies used (Amount of adjustment) P 1,240

Prepaid Insurance. The Prepaid Insurance account has a debit balance of 3,000, which represents prepayment of
insurance for three months beginning December 1, 2016

Dec. 1 Prepaid Insurance 3,000

Journal Entry Cash 3,000
(Initial) To record advance payment of
insurance
19
End of period Dec. 31 Insurance Expense (3,000/3) 1,000
Adjustment Prepaid Insurance 1,000
To record insurance expense

Assets = Liabilities + Owner’s Equity

Accounting
Equation Prepaid Insurance Insurance Expense
3,00 Dec 1,000 Dec 1,00
Bal.
0 31 31 0
Adj. 2,00
Bal. 0

The debit balance of P3,000 on prepaid insurance account represents a December 1 prepayment of
insurance for three months. At the end of December, the insurance expense account is increased (debited), and the
prepaid insurance account is decreased (credited) by P1,000, the insurance for one month.

EXHIBIT 2 Unearned Revenues

Transaction Advance receipt of cash for future service to be performed

Cash xx
Journal Entry Unearned Revenue xx
Revenue received in advance

Assets = Liabilities + Owner’s Equity

Accounting
Equation Cash Unearned Revenue
xx xx

Analysis Cash received in advance for future service to be performed is recorded as liability. The
transaction is recorded by debiting cash account and crediting unearned revenue
account.

Adjustment End-of-period adjustment to update the unearned revenue account

Unearned Revenue xx
Journal Entry Revenue xx
Adjustment for unearned
revenue

Assets = Liabilities + Owner’s Equity

20
Accounting
Equation Unearned Revenue Revenue
xx xx

Analysis The unearned revenue is decreased by debiting the amount of the revenue that has been
earned, and the related revenue account is increased by crediting.

Unearned Revenue. The Unearned Rent account has a credit balance of ₱3,600, which represents the receipt of
three-months’ rent beginning with December 1.

Dec. 1 Cash 3,600

Journal Entry Unearned Rent 3,600
(Initial) To record advance cash receipt
of rent for three months

End of period Dec. 31 Unearned Rent (3,600/3) 1,200

Adjustment Rent Revenue 1,200
To record rent revenue

Assets = Liabilities + Owner’s Equity

Accounting
Equation Unearned Rent Rent Revenue
De 1,200 3,600 1,200
Bal Dec
c
. 31
31
Adj. 2,40
Bal. 0
At the end of December, one month’s rent has been earned. Thus, the unearned rent account is decreased by
debiting an amount of P1,200, and the rent revenue account is increased by crediting the same amount. The
P1,200 represents the rental revenue for one month (P3,600/3).

EXHIBIT 3 Accrued Revenues

Transaction Revenue has been earned but not been recorded

Journal Entry No entry has been recorded

Assets = Liabilities + Owner’s Equity

Accounting
Equation No effect since the revenue has not been recorded

Analysis A revenue has been earned, but has not been received and recorded. No journal entry

21
 has been recorded even though revenue has been earned.

Adjustment End-of-period adjustment to recognize the accrued revenue account

Asset (Receivable) xx
Journal Entry Revenue xx
Adjustment for accrued revenue

Assets = Liabilities + Owner’s Equity

Accounting
Equation Receivable Revenue
xx xx

Analysis Asset account is increased by debiting the amount of the revenue that has been earned,
and the related revenue account is increased by crediting.

Accrued Revenue. Fees accrued at the end of December, but not recorded, total ₱500.

End of period Dec. 31 Accounts Receivable 500

Adjustment Fees Earned (Revenue) 500
To record fees earned

Assets = Liabilities + Owner’s Equity

Accounting
Equation Accounts Receivable Fees Earned
Dec 500 Dec 500
31 31

The Accounts Receivable account is increased by debiting an amount of $500, and the Fees Earned account is
increased by crediting the same amount.

EXHIBIT 4 Accrued Expenses

Transaction Expense has been incurred but not been recorded

Journal Entry No entry has been recorded

Assets = Liabilities + Owner’s Equity

Accounting
Equation No effect since the expense has not been recorded

22
 Analysis An expense has been incurred, but has not been paid. No journal entry has been
recorded even though expense has been incurred.

Adjustment End-of-period adjustment to recognize the accrued expense account

Expense xx
Journal Entry Liability (Payable) xx
Adjustment for accrued expense

Assets = Liabilities + Owner’s Equity

Accounting
Equation Payable Expense
xx xx

Analysis Expense account is increased by debiting the amount of the expense that has been
incurred, and the related liability account is increased by crediting.

Accrued Expense. Wages accrued but not paid at the end of December total ₱2,500.

End of period Dec. 31 Wages Expense 2,500

Adjustment Wages Payable 2,500
To record wages expense

Assets = Liabilities + Owner’s Equity

Accounting
Equation Wages Payable Wages Expense
De 2,500 2,500
Dec
c
31
31

The Wages Expense account is increased by debiting an amount of P2,500, and the Wages Payable account is
increased by crediting the same amount.

EXHIBIT 5 Depreciation

Adjustment End-of-period adjustment to recognize the depreciation

Depreciation Expense xx
Journal Entry Accumulated Depreciation xx
Adjustment for depreciation

Assets = Liabilities + Owner’s Equity

Accounting
Equation Accumulated Depreciation Depreciation Expense
xx xx

23
 Analysis Depreciation account is increased by debiting the amount of the expense that has been
incurred, and the contra-asset account, accumulated depreciation is increased by
crediting.

Depreciation Expense. Depreciation of the office equipment is ₱1,500 for December.

End of period Dec. 31 Depreciation Expense 1,500

Adjustment Accumulated Depreciation 1,500
To record fees earned

Assets = Liabilities + Owner’s Equity

Accounting
Equation Accumulated Depreciation Depreciation Expense
Dec 1,50 Dec 1,50
31 0 31 0

Depreciation Expense account is increased by debiting an amount of P1,500, while Accumulated Depreciation, a
contra-asset account, is increased by crediting the same amount.

The Worksheet
What is the Worksheet?
This is a multi-column document used by accountants to summarize and post all the necessary
information such as the Trial balance, adjustments, closing entries and the post – closing trial balance for the
preparation of the financial statements. The accountant usually prepares the worksheet when adjusting and
reconciling accounts and balances for the preparation of the financial statements. This document is prepared to
simplify and see through the adjusting and closing process and at the same time reveal errors and misstatements if
there be any.
Steps in Preparing the Worksheet
1) Write the heading on the top center of the paper having with it first the name of the company and the date.
To illustrate:
James Red Massage Services
Worksheet
For the year ended December 31

24
2) Plot and enter in the account balances in the unadjusted trial balance column with its total amount.
Note that total debits must equal total credits. List all accounts regardless if it has zero balances or not.
This will ensure the completeness and accuracy when adjusting accounts.
3) Enter the adjusting entries in the adjustment column placing the number and letter of adjustments accordingly
in debit and credits as shown in the adjusting entries. Again total debits must equal total credits.
4.) Apply the adjustments in the unadjusted trial balance by combining them. Add if it corresponds to the normal
balance of the account and deduct if it is does not. Extend the amount to the adjusted trial balance for those
accounts with no adjustments.

To illustrate:

(Step James Reid Massage

1) services company

Worksheet
For the month ended
(STEP 2) (STEP 3) (Step 4) Dcember 31
Unadjusted trial
balance Adjustments Adjusted trial balance
N Account
o. title Debit Credit Debit Credit Debit Credit
11
0 Cash 500 500
12 Accounts
0 recievable 250 250
13
0 Supplies 150 150
14 b.
0 Prepaid rent 200 20 180
15 Insurance a.
0 expense 300 15 315
16 Accounts
0 payable 450 450
17 Supplies
0 Payable 250 250
18
0 Reid, Capital 560 560
19
0 Reid, drawing 20 20
20 Massage
0 revenue 300 300

25
 20 Salaries
1 expense 50 50
20
2 Rent expense 30 b. 20 50
20 Prepaid a.
3 insurance 25 15 10
20 Bad debts
4 expense 35 c. 25 60
20 c.
5 Allowance for bad debts 25 25
P1,58
P1,560 P1,560 P60 P60 5 P1,585

The following were the adjusting entries on December 31, 2016:

a.) Insurance expense is to be recognized in the amount of P15 for the year:
Insurance expense 15
Prepaid Insurance 15
To record expired insurance

b.) Rent expense to be recognized this year is P20.

Rent expense 20
Prepaid rent 20
To record expired rent
c.) Estimated bad debts is P25
Bad debts expense 25
Allowance for Bad debts 25
To record estimated bad debts account

5.) After accomplishing the adjusted trial balance, the next column would be for the financial statements. The
financial statements are composed of the Income statement, Balance sheet or the statement of financial position,
the statement of changes in equity and the statement of cash flows. However, only the income statement and
balance sheet are shown in the worksheet. After posting the adjusted trial balance, extend the balances of the
income and expenses to the income statement column. Total the expenses and income and get their difference.
When the credit total of the income statement is greater than the debit total, the difference is Net income.
Otherwise it will result to a net loss. Differences should be the same thereafter. Indicate if it is a net income or a
net loss under the account titles column.

26
6.) Start the balance sheet by extending the account balances of all Assets, liabilities and Capital or Owner’s
equity. Get their totals and same with the procedure done in the income statements get their difference and that
difference must be the same or else there is something wrong in your computations probably errors or
miscalculations. Review your work again and focus.

7.) Double rule all totals of the worksheet presentation.

Completing the accounting cycle

Journalize closing entries
At the end of the period, after all accounts have been posted, adjusted and balanced, there are accounts
that are temporary for the reason that these accounts are only accumulated information on a specific accounting
period.
These temporary accounts are the income, expenses and withdrawals. These accounts are “closed” to
the owner’s capital account. Meaning, the net cumulative balances of these temporary account are transferred to
the capital balance account. Therefore, a closing entry is made to bring the balances of these temporary accounts
to zero because as said, these account balances will then be transferred to the capital account balance. Note that
every account is independent from the other.
To close these temporary accounts, an income summary or a summary account is used in closing
income and expenses.

In illustration, taken from the trial balance are the accounts of James Reid Massage Services:
Massage revenue 1,500
Reid, capital 3,000
Reid, drawing 500
Rent expense 300
Supplies expense 350
Salaries expense 150
Insurance expense 100

The following steps must be followed in closing the Accounts:

Step 1: Close the income account
Dec. 31 Massage revenue 1,500
Income summary 1,500

27
 To close the income account
Explanation: An income account has a normal credit balance; hence to close this account balance, it will
have to be debited to be able to bring its balance to zero.
Step 2: Close the expense account
Dec. 31 Income summary 900
Rent expense 300
Insurance expense 100
Salaries expense 150
Supplies expense 350
To close expense accounts

Explanation: Since an expense account has a normal debit balance; all of these expense accounts are credited to
income summary to bring the account balance to zero.

Step 3: Close the income summary account

After closing the income and expense account, notice that the balance of the income summary account is
equal to the Net income and Net loss or expenses for the period. The credit balance of the income summary
shown above indicates the income and the debit balance is the Net loss or expenses. Regardless of its balance, the
income summary account must be closed to the capital account.

Dec. 31 Income summary 600

Reid, Capital 600
To close income summary
Explanation: The entry is made to close the income summary account to the capital account which in effect
will transfer the income and expense accounts balances to the capital account. The amount of P600 was computed
by deducting the credit balance of 1,500 to the debit balance of 900 of the Income summary.

Step 4: Close the drawing or withdrawal account

This account represents the amount withdrawn by the owner for personal use. It is for this very reason
that as a normal debit balance should be closed to capital as follows:
Dec. 31 Reid, capital 500
Reid drawing 500
To close drawing account to capital
Prepare the Post-closing trial balance

28
 In preparing the financial statements, it is of high importance that every account in the worksheet is presented
accurately, free from errors and misstatement as much as possible. Therefore the Post – Closing trial balance is
prepared to test and make sure of the equality of the accounts posted in both debits and credits.
This new trial balance only contains of the balance sheets accounts such as Assets, Liabilities and capital since
all income and expense account, as well as the drawing account have been closed to capital resulting in zero
balances. Hence there is no more need to present this in the trial balance.

To illustrate, the following is the Post – Closing Trial Balance of James Reid:
James Reid Massage Services
Post-Closing Trial Balance
December 31, 2016
Dr. Cr.
Cash 2,050
Accounts Receivable 800
Prepaid rent 250
Prepaid insurance 50
Equipment 700
Accounts payable 850
Reid, Capital 3,000
P3,850 P3,850
REVERSING ENTRIES
These entries are made on the first day of the next accounting period. These reversing entries are actually
optional and are not used in any adjustments. Their purpose is only to simplify the accounting process. It is a
journal entry that is the exact opposite of a related and specific adjusting entry made at the end of the preceding
period. Meaning, the adjusting journal entry of the previous period is reversed at the beginning of the next period.
The following are the adjusting entries that can be reversed:
1.) Accrued expenses
2.) Accrued income
3.) Unearned revenues (income method)
4.) Prepayments (expense method)

29
 To illustrate, the following are shown in a sequence of transactions specifically in supplies expense:
1) Adjusting Entry
Dec. 31 Supplies expense 350
Supplies payable 350
2) Reversing Entry
Jan. 1 Supplies payable 350
Supplies expense 350

30