The Worksheet
Principles of Accounting I
By:
Maria Aries Ortega – Poliquit, MICB, RCA, CAT
Instructor I
Department of Business & Management
College of Management & Economics
Objectives
At the end of this lesson, the student will be able to prepare
the closing and reversing entries.
Closing Entries
• These are entries made at the end of the accounting period to
zero out all the nominal (temporary) accounts and transfer the
balances to the owner’s equity account
• its purpose is to separate the transactions from the next
accounting period
Income Summary is the temporary account used to close the
revenue and expense accounts
Steps in Closing Nominal Accounts
Step 1: Close the Revenue Accounts
Pro-forma Entry:
Income
xxx
Income Summary
xxx
Step 2: Close the Expense Accounts
Pro-forma Entry:
Income Summary
xxx
Expenses
xxx
Steps in Closing Nominal Accounts
Step 3: Close the Income Summary Account
• If it is a credit balance (net income)
Pro-forma Entry:
Income Summary
xxx
Owner’s Equity
• If it is a debit balance (net loss)
Pro-forma Entry:
Owner’s Equity
xxx
Income Summary
Step 4: Close the Drawing Account
Pro-forma Entry:
Owner’s Equity
xxx
Owner’s Drawing
xxx
xxx
xxx
Reversing Entries
• The last step of the accounting cycle
• used to reverse selected adjusting entries made at year-end
of the prior accounting period
• The following entries should be reversed:
1. accrued revenue and expenses
2. prepaid expenses using the expense method
3. Unearned income using the income method
Reversing Entries
• Benefits of Reversing entries:
a. Reduces the chance of double recording of revenue and
expenses
b. promotes consistency in the accounting procedure
c. simplify recording in the following accounting period
d. provides more efficient processing of the actual invoices that
will be managed in the new accounting period