REVIEWER IN FUNDAMENTALS OF ACCOUNTANCY AND
BUSINESS MANAGEMENT 2
LESSON: CLOSING ENTRIES
CLOSING THE BOOK
After preparing the formal financial statements at the end of the accounting period, (usually at year-end),
the books of accounts are closed (specifically, the general ledger).
This is done by preparing the closing entries and ruling the ledger.
Closing entries are journal entries to close all nominal accounts (accounts appearing in the Statement of
Comprehensive Income). The nominal accounts are merely temporary accounts in the sense that the
balances are not carried forward to the next accounting period, hence the need to close.
Closing entries are done by debiting all nominal accounts with credit balances and crediting all nominal
accounts with debit balances.
INCOME AND EXPENSE SUMMARY ACCOUNT/ INCOME SUMMARY
Income Summary account is a temporary account where all nominal accounts are transferred. After
transferring all the balances of the nominal accounts to this account, the balance of this account
together will be closed (transferred to the owner’s capital account).
THE PROCESS OF CLOSING
1. Debit all the revenue accounts and credit the Income Summary account.
2. Debit the Income Summary account and credit all the expense accounts.
3. Determine the balance of the Income Summary account, close the balance to the Owner’s
capital account. To close the Income Summary account, put the balance on the opposite side
and the Owner’s Capital account will be the balancing account. If the Income Summary has a
credit balance, it means that there is a net income/profit. If it has a debit balance, it means there
is a net loss.
4. The balance of the Owner’s Drawing account will also be close to the capital account to
determine the Owner’s Equity at the end of the period.
LESSON: SPECIAL JOURNALS
Journal is the book of original entry. It is used to record all kinds of business transactions.
Special journal records ONE particular TYPE of transactions that occurs frequently. It is designed to
systematize the original recording of major recurring types of transactions.
ADVANTAGES OF SPECIAL JOURNALS
1.
2.
3.
4.
5.
It saves time in journalizing.
It saves time in posting.
It eliminates the detail from the general ledger.
It promotes division of labor.
It aids in management analysis.
EXAMPLES OF SPECIAL JOURNAL
SALES JOURNAL - used to record all sales of merchandise on account.
CASH RECEIPTS JOURNAL- used to record all inflows or receipts of cash into the business.
PURCHASE JOURNAL - used to record all purchases of merchandise and other items on account.
CASH DISBURSEMENT JOURNAL - used to record all payments or outflows of cash by the business.
LESSON: BANK RECONCILIATION
BANK RECONCILIATION
Is a statement which brings into agreement the cash balance per book and the cash balance per book
and the cash balance per bank. It usually prepared monthly because the bank provides the depositor
with the bank statement at the end of the month.
KINDS OF STATEMENT
a. Demand Deposit – Current accounts or checking account or commercial paper where the
deposits are covered by deposit slips and where funds are withdrawals on demand by drawing
checks against the bank,
b. Saving Deposit the depositor is given a passbook upon initial deposit. This passbook is required
when making deposits and withdrawals.
c. Time deposit – this is similar to saving deposit in the sense that it is interesting bearing. Time
deposit may be preterminated or withdrawable on demand or after a certain period of time
agreed upon.
RECONCILING ITEMS
1. BOOK reconciling items:
A. Credit memorandum – refers to items representing deposit credited by the bank to the
account of the depositor but not yet recorded as cash receipts.
a. Notes receivable collected by the bank in the favor of the depositor.
b. Proceeds of bank loan.
c. Matured time deposit transferred by the bank to the current account of the
depositor.
B. Debit memorandum - refers to the items representing checks paid by the bank which
are charged and debited by the bank to the account of the depositor but not yet
recorded by the depositor as cash disbursements
a. NSF or no sufficient fund checks - these are checks deposited but returned by
the bank because of insufficiency of the funds.
b. Technically effective checks – these are checks deposited but returned by the
bank because of the technical defects.
c. Bank service charge
d. Reduction of loan
C. Errors
2. BANK reconciling items:
A. Deposit in transit - are collections already recorded by the depositor as cash receipts
but not yet reflected on bank statement.
a. Collections already forwarded to the bank for deposit but too late to appear
in the bank statement.
b. Undeposited collections or those cash still in the hands of the depositor.
B. Outstanding checks are checks already recorded by the depositors as cash disbursements
but not yet reflected on the bank statement.
a. Checks already given to payees but not presented for payment,
b. Certified check is one where the bank has stamped on its face the word
accepted or certified indicating sufficiency of fund.
LESSON: PERIODIC AND PERPETUAL INVENTORY SYSTEM
ACCOUNTING FOR INVENTORIES
An accurate merchandise inventory figures is needed to determine the cost of goods sold.
PERPETUAL INVENTORY SYSTEM
-Provides accounting records that continuously disclose the amount of inventory.
PERIODIC INVENTORY SYSTEM
-The ending inventory is determined by making a physical measurement of the goods on hand at the end
of the period.
PURCHASES OF MERCHANDISE
ACCOUNT TITLE: PURCHASE
NORMAL BALANCE: DEBIT
Under the periodic inventory system, a Purchases Account is used to record cost of goods or
merchandise brought for resale during the current account period.
EXAMPLE:
May 1 The company purchased P3,750 of merchandise for cash.
Purchases
Cash
3750
3750
May 10 Purchased P4,500 of merchandise on account.
Purchases
Accounts Payable
4500
4500
CONTRA ACCOUNT OF PURCHASE
Purchase Discount – Is a contra account to Purchases that reduces the recorded gross invoice cost of the
purchase to the price actually paid.
EXAMPLE:
May 10 Purchased P4,500 of merchandise on account, terms, 2/10, n/30. Assume that the merchandise
is paid by May 20.
May 10
Purchases
Accounts Payable
4500
4500
May 20
Accounts Payable
Cash
Purchase Discount
4500
4410
90
Purchase Returns – Occurs when the buyer returns the merchandise to a seller.
Purchase Allowance – Occurs when the buyer receives an allowance (or deduction) in the price of goods
shipped.
Net Purchase – Purchases Returns and allowances is shown on the Income Statement as a deduction
from purchases. When both purchase discounts, purchase returns and allowances are deducted from
purchases, the result is NET PURCHASES.
LESSON: MERCHANDISING 6
Operating Expenses - are usually classified as distribution or selling expenses, and general or
administrative expenses.
Selling Expenses - expenses incurred in the selling and marketing efforts. (salaries for salespersons,
delivery, advertising, rent, utilities on sales building, sales supplies used, and depreciation on equipment
used in sales)
Administrative Expenses - expenses incurred in the overall management of a business. (office salaries,
rent, utilities on admin. Building, office supplies used, and depreciation on equipment and insurance
expense).
Non-operating Expenses (other Expenses) - expenses not related to the acquisition and sale of the
products or services regularly offered for sale.
Non -operating Revenues (other revenues) - Revenues not related to the sale of products or services
regularly offered for sale by a business.
LESSON: REVERSING ENTRIES
What is a reversing entries?
It is the last step in accounting cycle. These are journal entries made at the beginning of an accounting
period to reverse or cancel out adjusting journal entries made at the end of the previous accounting
period.
Why reversal entries are used?
These are usually made to simplify bookkeeping in the new year or next accounting period.
EXAMPLE:
May 2018, Bida Company pay its employees every Saturday of the month, Php 4,800 for a six day work
week. And on June 2, paid Php 4,800 for the salaries. Give the adjusting and reversing entries.
Salaries Expense
Cash
1600
1600
Cash
Salaries Expense
1600
1600
Created by:
Mark James B. Teodoro
ABM Society – Publicity Committee Co-Head
Created by:
Santiago Calinao
ABM Society – Protocol Officer