Course Code and Title: BAEN 1 – Principles of Accounting (BSBA)

Lesson Number : 11

Topic : Closing Entries, Post-closing Trial Balance and

Reversing Entries

Professor : Rosario A. Calamba, CPA, Phd

INTRODUCTION:

This module will illustrate how to prepare the closing entries, post-closing trial
balance and reversing entries for a service type of business operation.

LEARNING OBJECTIVES:

At the end of this module, the learners are expected to:

1. Explain the need for closing entries at the end of the accounting period.
2. Recognize the necessity of a post-closing trial balance.
3. Have the readiness for the opening of a new set of accounting records for the
next accounting period.
4. Identify the accounts that requires reversing entries.

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PRE-ASSESSMENT:

Multiple Choice:

1. Which of the following accounts could appear in an adjusting entry, closing entry
and reversing entry?
a. Interest Income c. Salaries Payable
b. Accumulated Depreciation-Buildings d. Depreciation Expense-Buildings

2. When there is a loss, the entry to close the Income Summary account is:
a. Debit Loss and credit Income Summary
b. Debit Owner’s Capital and credit Income Summary
c. Debit Income Summary and credit Loss
d. Debit Income Summary and credit Owner’s Capital

3. The post-closing trial balance contains:

a. Real accounts only
b. Nominal accounts only
c. Both real accounts and nominal accounts
d. Neither real accounts nor nominal accounts

4. An important purpose of closing entries is to:

a. Adjust the accounts in the ledger.
b. Set nominal account balances to zero at the start of the next period.
c. Set real account balances to zero at the start of the next period.
d. Help in preparing financial statements

5. The primary objective of reversing entries is to:

a. Correct errors
b. Simplify the bookkeeping associated with accruals from the prior period.
c. Transfer the balance of the expense accounts to the Owner’s Capital account
and set the accounts equal to zero.
d. Place the expenses for the current period in the proper accounts.

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LESSON PRESENTATION:

CLOSING ENTRIES:

The works of an accountant does not end after the preparation of financial
statements. Compliance of an accounting requirement is the “closing of the books of
accounts” signaling the end of an accounting period.

Not all accounts are closed. Only the nominal accounts, often times called
temporary accounts and the drawing account are closed at the end of the accounting
period. Income, expense and withdrawal accounts are temporary accounts that
accumulate information related to a specific accounting period.

By closing, this means that a nominal account which has an open balance will be
reduced to “Zero” balance. Thus, a nominal or income statement account with a debit
balance will be credited in the closing entry by an amount equal to its debit. On the
contrary, a nominal or income statement account with a credit balance will be debited in
the closing entry by an amount equal to its credit.

Closing simply transfer the balance of one account to another account. In this
case, the balances of these temporary accounts are transferred to the capital account.
A summary account – Income Summary is used to close the income and expense
accounts.

PROCEDURES IN CLOSING THE NOMINAL ACCOUNTS

1. Close the Income accounts

Income accounts have credit balances before the closing entries are posted. An
entry debiting each revenue account in the amount of its balance is needed to close
the account. The credit is made to the Income Summary account.
The entry to close the income account for Rialubin Travel Agency is as follows:

Dec. 31
Travel Revenue P5,133,000
Income Summary P5,133,000
To close Income to the Income Summary account.

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2. Close the Expense accounts

Since Expenses have normal balances of debit, a compound entry is needed

crediting each expense account for its balance and debit the Income Summary
account for its total in order to close it.

Dec. 31
Income Summary P4,254,000
Salaries Expense P3,876,000
Rent Expense 120,000
Office Supplies Expense 36,000
Depreciation Expense 75,000
Interest Expense 54,000
Miscellaneous Expense 93,000
To close expenses to Income Summary account.

3. Close the Income Summary account

After posting the closing entries involving the income and expense accounts, the
balance of the Income Summary account will be equal to the “Profit or Loss” for the
period. A Profit is indicated by a credit balance and a Loss by a debit balance.
The Income Summary account, regardless of the nature of its balance, must be
closed to the “Capital” account.

Dec 31

Income Summary P879,000

Rialubin, Capital P879,000
To close “Profit” to the Capital account

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4. Close the Drawing account
The Drawing account shows the amount by which Capital is reduced during the
period by withdrawals of cash or other assets of the business by the owner for personal
use. The debit balance of the Drawing account must be closed to the capital account.

Dec. 31

Rialubin, Capital P1,200,000

Rialubin, Drawings P1,200,000
To close Drawings to Capital account.

POST-CLOSING TRIAL BALANCE:

After closing all the nominal or Income Statement accounts, another trial balance is
prepared to prove the equality of debits and credits remaining “open” in the General
Ledger. This time, the accounts left with balances are all real accounts or permanent
accounts because all nominal accounts or temporary accounts including the drawing
accounts have zero balances after closing.

Rialubin Travel Agency

Post-Closing Trial Balance
As of December 31, 2020

Cash P 126,000
Accounts Receivable 645,000
Prepaid Rent 240,000
Office Supplies 27,000
Furniture 2,175,000
Accumulated Depreciation P 510,000
Notes Payable 900.000
Accounts Payable 285,000
Salaries Payable 105,000
Interest Payable 54,000
Rialubin, Capital 1,359,000
TOTAL P3,213,000 P3,213,000

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REVERSING ENTRIES

Reversing Entries are journal entries that is being recorded in the General Journal
and is done at the beginning of the accounting period after the preparation of the opening
entry. These are made in order to transfer 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.

These are called reversing entries because they are the exact opposite of a related
adjusting entries made at the end of the accounting period. It is basically a bookkeeping
technique made to simplify the recording of regular transactions in the next accounting
period. Reversing entries do not mean that the adjusting entries reversed are
unnecessary or inaccurate.

The adjustments normally requiring reversal at the beginning of the new accounting
period are as follows:
1. Accrued expenses
2. Prepaid expenses (if the expense method is used in recording expense)
3. Accrued income
4. Deferred revenue (if income method is used in recording income)

General Journal

Date Particulars Debit Credit

2021
January1 Salaries Payable 105,000
Salaries Expense 105,000
To reverse the accrual of salaries.

Interest Payable 54,000

Interest Expense 54,000
To reverse the accrual of
interest.

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ACTIVITY / EVALUATION:

Presented below is the adjusted trial balance of Elvie Zulueta, a CPA for the year ended
December 20A:

Elvie Zulueta, CPA

Adjusted Trial Balance
December 31, 20A

Cash in Bank P 78,000

Accounts Receivable 35,000
Estimated Uncollectible Account P 480
Unused Supplies 12,500
Office Equipment 45,000
Accumulated Depreciation 4,500
Accounts Payable 13,000
E. Zulueta, Capital 47,500
E. Zulueta, Drawing 15,000
Professional Income 180,000
Uncollectible account 480
Depreciation Expense 4,500
Utilities Expense 25,000
Supplies Used 5,000
Salaries Expense 15,000
Rent Expense 10,000
Total P245,480 P245,480

Required:
1. Closing Entries
2. Post-closing Trial Balance

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Closing Entries:

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Post-closing Trial Balance:

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 References

Suggested Textbooks:

Lopez, Jr. Rafael M. (2018 Revised Edition) Basic Accounting for Non-Accountants:

Simplified Procedural Approach based on PAS: MS Lopez Printing & Publishing

Vera Cruz-Manuel, Zenaida (2017), 21st Century Accounting Process: Concepts and

Procedures: Raintress Trading & Publishing

Ballada, Win (2017), Fundamentals of Accounting: DomDane Publishers

Balatbat-Cabrera, Ma. Elenita (2019), Financial Accounting and Reporting: GIC

Enterprises & Co., Inc.

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