FUNDAMENTALS OF ACCOUNTANCY,

BUSINESS AND MANAGEMENT 1

MODULE
Module No. 2: Week 2: Second Quarter
COMPLETE ACCOUNTING CYCLE OF A SERVICE BUSINESS

Learning Competencies (Essential Competencies)

The learner will be able to complete the accounting cycle.
Code: ABM_FABM11- IVa-d -34
Let’s Recall (Review)
I. True or False. Write T is the statement is True and F if it is not. Write your answer in
your answer sheet.
1. A service business is one that offers services as its main product rather than physical goods.
2. The purpose of posting is to classify the effects of transactions to specific asset, liability, equity, income
and expense accounts in order to provide more meaninful information.
3. Unadjusted trial balance is prepared after adjusting entries but before the financial statements are prepared.
Let’s Understand
PREPARATION OF AN ADJUSTED TRIAL BALANCE
After the preparation of the adjusting entries, the next step in the accounting cycle is the
preparation of the adjusted trial balance. Again, an adjusted trial balance is prepared after
adjusting entries are made and posted to the ledger.
To illustrate how it works, here is a sample unadjusted trial balance:

Notes: Preparing the Worksheet

1. Account titles used in the adjusting entries but were not previously included in the unadjusted trial balance
are placed at the bottom part of the “Accounts” column of the worksheet.
2. The debits and credits of the adjusting entries are then placed on the “Adjustments” column of the
worksheet.
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3. Amounts in the “Unadjusted Trial Balance” and “Adjustments” columns are combined to come up with
the adjusted balances of the accounts. The adjusted balances are placed on the Adjusted Trial Balance.

To combine amounts, we observe the following rules of debits and credits:

• Debit and debit means you ADD
• Credit and credit means you ADD
• Debit and credit, or vice versa, means you SUBTRACT and place the amount of which has the greater
value.

PREPARATION OF FINANCIAL STATEMENTS THROUGH WORKSHEET

After the preparation of the adjusted
trial balance, the next would be the
preparation of the financial
statements. Thus, financial
statements are the end product of the
accounting process. The financial
statements are (a) Statement of
Financial Position, (b) Statement of
Profit or Loss, (c) Statement of
Changes in Equity, (d) Statement of
Cash Flows, and (e) Notes.
But for now, we will only prepare the
first two financial statements for the
others will be discussed on
Fundamentals of Accountancy,
Business and Management 2.
1. Statement of Financial Position
(or Balance Sheet) shows
information on assets, liabilities and
equity.
2. Statement of Profit or Loss (or Income Statement) shows information on income and expenses, and
consequently, the profit or loss for the period.

The preparation of the balance sheet and the income statement is greatly facilitated by the worksheet. In the
worksheet, all income and expenses accounts in the adjusted trial balance are simply extended to the income
statement columns while all assets, liabilities and equity accounts are extended to the balance sheet columns.

Let’s prepare the balance sheet and income statement columns of Papa Electronic Repair Shop.

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 Papa Electronic Repair Shop
Worksheet
for the period ended December 31, 2019
Accounts Unadjusted Trial Adjustments Adjusted Trial Income Statement Balance Sheet
Balance Balance
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash P374 000 P374 000 P374 000
Accounts Receivable 170 000 (a)P15 000 155 000 155 000
Service Supplies 75 000 75 000 75 000
Furniture and Fixtures 150 000 150 000 150 000
Service Equipment 800 000 800 000 800 000
Accounts Payable P450 000 P450 000 P450 000
Loans Payable 600 000 600 000 600 000
Papa, Capital 660 000 660 000 660 000
Papa, Drawing 350 000 350 000 350 000
Repair Fees Earned 477 500 (a)P15 000 462 500 P462 500
Rent Expense 75 000 75 000 P75 000
Salaries Expense 175 000 175 000 175 000
Taxes and Licenses 18 500 18 500 18 500
Totals P2 187 500 P2 187 500
Adjustments
Utilities Expense (b)90 000 90 000 90 000
Utilities Payable (b)90 000 90 000 90 000
Depreciation Expense – (c)45 000 45 000 45 000
Service Equipment
Accumulated (c)45 000 45 000 45 000
Depreciation Expense –
Service Equipment
Totals P150 000 P150 000 P2 307 500 P2 307 500 P403 500 P462 500 P1 904 000 P1 845 000
Profit (or Loss) 59 000 59 000
Totals P462 500 P462 500 P1 904 000 P1 904 000

Just EXTEND the various amounts After amounts are extended

here to the right balance sheet and to the income statement and
income statement columns. balance sheet columns, the
balancing figure is the profit
(or loss). i.e. P59,000.

PREPARATION OF THE CLOSING ENTRIES

Preparation of the closing entries is the next step in the accounting cycle. Closing Entries are the entries
prepared at the end of the accounting period to zero out all nominal accounts in the ledger. This is done so
that the transactions during the period will not commingle with the transactions in the next period.
Closing entries are prepared as follows:
1. All income accounts are debited and all expense accounts are credited. The resulting balance is recorded
in a clearing account called the “Income Summary”.
2. The balance of “Income Summary” is closed to the “Owner’s Capital” account.
3. Any balance in the “Owner’s Drawings” account is closed to the “Owner’s Capital” account.

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 Papa Electronic Repair Shop
Worksheet
for the period ended December 31, 2019

Note: We will close all the nominal accounts – income and expenses, including owner’s drawings (i.e., those
that are highlighted above).
Closing Entry #1: Income and Expense Summary
The income and expense accounts are closed to the Income and Expense Summary account as follows:
2019 Repair Fees Earned 462 500
Dec. 31 Rent Expense 75 000
Salaries Expense 175 000
Taxes and Licenses Expense 18 500
Utilities Expense 90 000
Depreciation Expense- Ser.Eq. 45 000
Income and Expense Summary (squeeze) 59 000
To close income and expense accounts to
income and expense summary
How did you get the P59 000 income and expense summary?
1. Add all the expenses – 75,000 + 175,000 + 18,500 + 90,000 + 45,000 = P403,500.
2. Subtract all the expenses from the income – i.e., P462,500 – 403,500 = P59,000.
The amount in the income and expense summary account (i.e. P59,000) is the balancing figure in the closing
entry. This amount represents the profit (or loss) for the period. Notice that this is the same amount of
balancing figure in the worksheet.
Closing Entry 2: Income and Expense Summary closed to Equity
The income and expense summary is closed to the “Owner’s Capital” account as follows:
2019 Income and Expense Summary 59 000
Dec. 31 Papa, Capital 59 000
To close the income and expense summary to
equity
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Closing Entry 3: Drawings account closed to Equity
2019 Papa, Capital 350 000
Dec. 31 Papa, Drawing 350 000
To close the drawing account
Notice that the drawings account is closed directly to the owner’s equity account rather than through income
and expense summary account. This is because the drawings account is neither an income nor an expense
account but rather a contra-equity account. As such, owner’s drawings do not enter into the computation of
profit or loss.
PREPARATION OF THE POST-CLOSING TRIAL BALANCE
Post-closing trial balance – the amount in the Adjusted Trial Balance (or the Income Statement and Balance
Sheet columns) are cross-footed with the amounts in the Closing Entries columns. The resulting amounts are
then placed in the Post-closing Trial Balance.
Thus, the amounts in the Post-closing Trial Balance will be the beginning balances of accounts in the next
accounting period. Take note that you can add columns for the closing entries and post-closing trial balance.
Just like the example below which complete the worksheet for Papa Electronic Repair Shop.
Papa Electronic Repair Shop
Post-Closing Trial Balance
December 31, 2019

GENERAL INSTRUCTION:
1.Read and follow instructions carefully.
2. COPY and ANSWER on a separate sheet of paper.
3. Answer this activity with all HONESTY and INTEGRITY.

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 Let’s Apply
Directions: Prepare a 10-column worksheet using the data below.

The following are the adjustments during the period:

P P

Let’s Analyze
Directions: Prepare balance sheet and income statements in formal reports using the
data given in the Let’s Apply Activity.
1. Statement of Financial Position
2. Statement of Profit or Loss

Let’s Try (Evaluation)

A. Prepare the closing entries and post-closing trial using the information below.
Below is an alphabetical list of accounts of Master Cleaners as of December 31, 2019, after
all the adjusting entries have been posted.

Accounts Payable 2,700 Income Summary

Accumulated Depreciation - Equipment 2,800 Insurance Expense 1,600
Cash 2,600 Miscellaneous Expense 300
Depreciation Expense – Equipment 700 Prepaid Insurance 200
Goodrich, Capital 6,200 Rent Expense 2,400
Goodrich, Drawing 7,000 Advertising Expense 900
Equipment 12,300 Utilities Expense 800
Income from Services 29,800 Wages Expense 3,700
Instructions:
1. Journalize the closing entries in proper order
2. Record the account balances in T-accounts for owner’s equity, revenue, and expense accounts.
3. Prepare a post-closing trial balance

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