SAN PEDRO COLLEGE

12 C. Guzman Street, 8000 Davao City, Philippines

Master of Arts in Hospital Administration

Third Trimester, SY 2019-2020

SEMINAR IN ACCOUNTING

LESSON 3 – COMPLETING THE ACCOUNTING CYCLE

WORKSHEET

It is used to facilitate the preparation of financial statements, particularly the income

statement and balance sheet. It is an optional tool to convert and summarize a trial
balance into financial statements.

In preparing the worksheet, certain rules are observed:

a. In the Income Statement columns – if the total of the debit exceeds the total of
the credits, there is a net loss; if total of the credits exceeds the total of the
debits, there is a net income.

b. In the Balance Sheet columns – if the total of the credit exceeds the total of the
debits, there is a net loss; if total of the debits exceeds the total of the credits,
there is a net income.

CLOSING ENTRIES

It is used to close nominal accounts or reduce them to zero balances with the use of
income summary account. If there is a credit balance in the income summary account,
it indicates a net income for the period. Otherwise, a debit balance in the income
summary account means a net loss. The income summary account balance is then
closed to the owner’s equity account or retained earnings (for corporations).

POST-CLOSING TRIAL BALANCE

It is done to verify the equality of total debits and total credits for all real accounts to
ensure that the closing process has been performed correctly.

REVERSING ENTRIES

It is prepared to facilitate the recording of expenses and revenues in the next accounting
period by transferring all accrued and prepaid items established by adjusting entries to
the nominal accounts that are to be used in recording transactions during the new
period. In effect, there is no need to eliminate the need to monitor year-end adjusting
entries during the next accounting period. The preparation of reversing entries is also
optional.

The adjusting entries that normally require the reversal at the beginning of the new
accounting period are:

a. accrued expenses
b. prepaid expenses, if the expense method is used
c. accrued income
d. pre-collection of income- if the income method is used
Illustration: Dr. Pedro
Adjusted Trial Balance
As of December 31, __

Debit Credit
Cash P 200,000
Receivable from patients 500,000*
Allowance for bad debts P 50,000
Clinic supplies inventory 200,000
Prepaid salaries 30,000
Clinic equipment 500,000
Accumulated depreciation
- clinic equipment 50,000
Clinic furniture and fixtures 200,000
Accumulated depreciation
- clinic furniture & fixtures 25,000
Payable to suppliers 300,000
Light and water payable 10,000
Unearned professional fees income 120,000
Bank loans payable 200,000
Dr. Pedro, capital 850,000
Professional fees income 880,000
Depreciation expense 75,000
Bad debts expense 50,000
Supplies expense 300,000
Salaries expense 170,000
Light and water expense 110,000
Rent expense 150,000 _________
Total P2,485,000 P2,485,000

Based on the above adjusted trial balance, prepare the following:

a. Worksheet (6-column)
b. Financial statements (income statement and balance sheet)
c. Closing entries
d. Post-closing trial balance

Solution:

a. Worksheet (6-column)

b. Financial statements
 Dr. Pedro
Income Statement
For the year ending December 31, __

Professional fees income P880,000

Less: Operating expenses:
Depreciation P 75,000
Bad debts 50,000
Supplies 300,000
Salaries 170,000
Light and water 110,000
Rent 150,000 (855,000)
Net income P 25,000

Dr. Pedro
Balance Sheet
As of December 31, __

Assets
Current assets:
Cash P 200,000
Receivable from patients P500,000
Less: Allowance for bad debts ( 50,000) 450,000
Clinic supplies inventory 200,000
Prepaid salaries 30,000 P 880,000
Property and equipment:
Clinic equipment P 500,000
Less: Accumulated depreciation ( 50,000) P450,000
Clinic furniture and fixtures P 200,000
Less: Accumulated depreciation ( 25,000) 175,000 625,000
Total assets P1,505,000

Liabilities and Owner’s Equity

Current liabilities:
Payable to suppliers P 300,000
Light and water payable 10,000
Unearned professional fees income 120,000 P 430,000
Non-current liability:
Bank loans payable 200,000
Owner’s equity:
Dr. Pedro, capital P 850,000
Add: Net income 25,000 875,000
Total liabilities and owner’s equity P1,505,000

c. Closing entries

Debit Credit
1. Professional fees income P880,000
Income and expense summary P880,000

2. Income and expense summary 855,000

Depreciation expense 75,000
Bad debts expense 50,000
Supplies expense 300,000
Salaries expense 170,000
Light and water expense 110,000
Rent expense 150,000

3. Income and expense summary 25,000

Owner’s equity 25,000
d. Post-closing trial balance

Dr. Pedro
Post-Closing Trial Balance
As of December 31, __

Debit Credit
Cash P 200,000
Receivable from patients 500,000
Allowance for bad debts P 50,000
Clinic supplies inventory 200,000
Prepaid salaries 30,000
Clinic equipment 500,000
Accumulated depreciation
- clinic equipment 50,000
Clinic furniture and fixtures 200,000
Accumulated depreciation
- clinic furniture & fixtures 25,000
Payable to suppliers 300,000
Light and water payable 10,000
Unearned professional fees income 120,000
Bank loans payable 200,000
Dr. Pedro, capital _________ 875,000
Total P1,630,000 P1,630,000
QUIZ – COMPLETING THE ACCOUNTING CYCLE

Multiple Choice:

1. Closing entries:
a. are optional step in the accounting cycle.
b. affect only balance sheet accounts.
c. permit a company to analyze routine and repetitive transactions the same way all the
time.
d. remove the balances from the firm’s temporary accounts.

2. The account “income summary” is a:

a. nominal account
b. capital account
c. real account
d. mixed account

3. The credit balance in the income summary account represents:

a. net income
b. liability
c. net loss
d. capital

4. If revenues are greater than expense, the income summary account will be closed by:
a. crediting income summary and debiting retained earnings.
b. debiting income summary and crediting retained earnings.
c. debiting cash and crediting income summary.
d. debiting income summary and crediting cash.

5. Reversing entries:
a. must be made at the end of each period.
b. are made to correct erroneous journal entries.
c. eliminate the need to monitor the effect of year-end adjusting entries during the next
period.
d. are synonymous with adjusting entries.

6. The summarizing phase in the accounting process does not include:

a. preparing the unadjusted trial balance
b. preparing the adjusting entries
c. recording the transactions in the journal
d. preparing the financial statements

7. Assuming a company is profitable in the current period, the total of the balance sheet credit
column in the worksheet will be:
a. larger than the balance sheet debit column.
b. smaller than the balance sheet debit column.
c. larger than the income statement debit column.
d. larger than the income statement credit column.

8. A post-closing trial balance:

a. is a listing of general ledger accounts and their balances after closing entries have been
made.
b. consists entirely of real accounts.
c. helps to insure that the closing process has been performed correctly.
d. all of the above

9. A reversing entry may be used for which of the following adjusting entries?
a. debit insurance, credit prepaid insurance
b. debit interest receivable, credit interest income
c. debit unearned rent income, credit rent income
d. debit depreciation, credit accumulated depreciation
10. Which of the following is not optional?
a. use of an income summary account
b. preparation of a worksheet
c. making adjusting entries
d. preparation of a post-closing trial balance

CASE PROBLEMS – ADJUSTING THE ACCOUNTS

The following accounts were gathered from your clinic records and adjusted by your
bookkeeper as of December 31, 2019:

Accounts payable P 180,000

Supplies expense 180,000
Wages expense 330,000
Bank loans payable 400,000
Accumulated depreciation 54,000
Accounts receivable 150,000
Light and water expense 80,000
Rent expense 120,000
Prepaid insurance 60,000
Dr. Jared, capital 300,000
Professional fees income 788,000
Telephone and communication expense 170,000
Cash 200,000
Laboratory supplies inventory 130,000
Bad debts expense 15,000
Allowance for bad debts 30,000
Furniture and fixtures 270,000
Depreciation expense 27,000
Insurance expense 20,000

Required: Prepare the following:

a. Worksheet (6-column)
b. Financial statements (income statement and balance sheet)
c. Closing entries
d. Post-closing trial balance