WORKSHEET 4.

Income statement
A multiple column sheets wherein all 5. Balance sheet
necessary information used for the
The adjusted trial balance columns
preparation of the financial statement
simplify the extension to the financial
is recorded in a systematic process.
statement columns.
- not a permanent account.
STEPS IN COMPLETING THE
- not a part of a journal or ledger.
WORKSHEET
- a device used for easy
preparation of adjusting entries 1. Enter the trial balance figures
and financial statements from the ledger - The balance of
- a multi-column sheet or a each general ledger account is
computer spreadsheet where entered in the appropriate trial
the accountant writes, in brief, balance column of the worksheet. The
information necessary for the balances summarize all the
preparation of adjusting entries transactions for December before any
and financial statements. adjusting entries have been applied.
WORKSHEET PROCEDURE: 2. Enter the adjustments - After the
trial balance figures have been
The worksheet is usually prepared in
entered and the totals are in
pencil on a large sheet of accounting
agreement; the adjusting entries
stationery called analysis paper. All
should be entered in the second pair
procedures can be reviewed quickly,
of columns. The related debits and
and the adjusting and closing entries
credits are keyed by letters so that
can be made in the formal records
they may be rechecked quickly for any
with less chance of errors.
errors. The letters should be in proper
For a typical service business, we may sequence, beginning with the accounts
suppose the worksheet to have eight at the top of the page.
money columns, namely a debit
a) Rent. Rent may be paid in advance;
and a credit column for four
at which time the debit would be to
groups of figures.
Prepaid Rent (an asset). As it expires,
1. Trial balance the Prepaid Rent account will be
reduced, as it must reflect only what
2. Adjustments
has been prepaid.
3. income statement
The entry to record the expired
4. Balance sheet rent is:

A ten-column worksheet also is - Rent Expense (Dr)

used, consisting of: - Prepaid Rent (Cr)

1. Trial balance (b) Supplies - This firm may have

purchased $800 worth of supplies to
2. Adjustments last for a few years. Only the cost of
3. Adjusted trial balance the supplies used during each year is
considered as an operating expense
for that period; the unused portion is income statement columns and the
deferred to future periods. For this balance sheet columns should also
reason, the purchase of supplies is prove out.
debited to an asset account and
4. Total the income statement
adjusted at the end of the year.
columns and the balance sheet
Because supplies of P200 were still on
columns. - The difference between
hand at the close of the period, it is
the debit and credit totals in both sets
understood that P600 had been used
of columns should be the same
and should be charged to the expense.
amount, which represents net income
The entry to record the expired or net loss for the period.
rent is:
5. Enter the net income or net
- Supplies Expense (Dr) loss. - In this example, the credit
- Supplies (Cr) column total in the income statement
is P10,000, the debit column total is
(c) Salaries - The salaries amount in
P8,200. The credit column, or revenue
the trial balance column should
side, is the larger, representing a net
include only the payments that have
income of P1,800 for the month. Since
been recorded and paid during the
net income increases capital, the net
month. The portion that was earned in
income figure should go on the credit
December but paid in the following
side of the balance sheet. The balance
year, because the weekly pay period
sheet credit column total of P16,900
ended in January, should not be
plus net income of P1,800 totals
included. Therefore, an adjusting entry
P18,700, which equals the debit
is needed to reflect the P400 earned
column total. Since both the income
but not yet paid.
statement columns and balance sheet
The entry to record the expired columns are in agreement, it is a
rent is: simple matter to prepare the formal
income statement and balance sheet.
- Salaries Expense (Dr)
- Salaries Payable (Cr) If there had been a loss, the debit or
expense column in the income
3. Extend the adjusted trial statement would have been the larger,
balance and the adjustments and the loss amount would have been
figures to either the income entered in the credit column in order
statement or balance sheet to balance the two columns. As a loss
columns. - The process of extending would decrease the capital, it would be
the balances horizontally should begin entered in the balance sheet debit
with the account at the top of the column.
sheet. The revenue and expense
accounts should be extended to the CLOSING ENTRIES - entries prepared at
income statement columns; the the end of the accounting period to
assets, liabilities, and capital to the zero out all nominal accounts in the
balance sheet columns. Each figure is ledger. This is done so that the
extended to only one of the columns. transactions during the period will not
After the adjusted trial balance column commingle with the transactions in the
totals have been proved out, then the next period.
Closing the Books - This involves - The balance of Income
journalizing and posting closing entries Summary is closed to the
and ruling the ledger. Temporary Owner’s Capital Account.
accounts (or nominal accounts) are - Any balance in the Owner’s
closed and the resulting profit or loss drawing account is closed to the
is transferred to an equity account. Owner’s Capital Account.
PERMANENT/REAL ACCOUNT -
Accounts whose balances remain open
Step 1: Transfer the balance of
indefinitely.
the Revenue Account balances to
Examples are part of Balance Sheet the Income Summary Account.
Accounts:
- The revenue accounts are
- Assets closed into a temporary account
- Liabilities known as Income Summary.
- Equity - Recall that the purpose of the
closing entries is too “close” or
TEMPORARY/NOMINAL ACCOUNT -
zero out the balance of the
Accounts that accumulate balances for
temporary accounts.
one accounting period only.
- Since revenue accounts have a
Examples are: normal credit balance, to be
closed the revenue accounts
- Revenues must be debited and Income
- Expenses Summary will be credited.
- Income summary
- Drawings (withdrawals) Note that the amount of the credit to
Income Summary is the total of the
INCOME SUMMARY ACCOUNT - A amounts debited to the revenue
special owner’s equity account that is accounts.
used only in the closing process to
summarize the results of operations. Step 2: Transfer the Expense
(Clearing Account). Account balances to the Income
Summary Account.
Has a zero balance after the closing
process and remains with a zero - As with the revenue accounts,
balance until after the closing expense accounts are closed
procedure for the next period. into Income Summary. Again,
the purpose of the closing
STEPS IN THE CLOSING PROCESS: entries is to “close” the balance
Remember: of the temporary accounts.
- Since expense accounts have a
- All income accounts are debited normal debit balance, they will
and all expense accounts are be credited in the closing entry
credited. The resulting balance and Income Summary will
is recorded in a clearing account therefore be debited.
called the Income Summary.
Note that the amount closed into
Income Summary is the total of the
POST-TRIAL BALANCE
expense accounts.
When all the closing entries have been
Step 3: Transfer the balance of the
journalized,
Income Summary account to the
Owner’s Capital Account 1. Post all the balances of the account
from the Journal of Closing Entries to
- The next closing entry will be to
the General Ledger.
close the Income Summary
account. 2. Make also a General Ledger for the
- Income Summary closes into Clearing Account – Income Summary
the Capital account. In order to Account.
complete this entry, you must
first determine the balance in 3. You will notice that as you add your
the Income Summary account. If Closing Entry Balances, those
you’re using a ledger, post the accounts become – close or zero out.
first two closing entries. If you 4. After all the posting, you can now
need to quickly determine the prepare a Post Closing Trial Balance to
balance, use a T-accounts ensure that debits and credits have
- Since the Income Summary remained in balance. The only
account had an ending credit accounts appearing on the Post
balance, Income Summary must Closing Trial Balance should be the
be debited for the amount of real accounts—all other accounts have
the ending balance to be closed. been closed.
Therefore, the capital account
must be credited. The columns in the “worksheet” can
be extended by adding columns for
Note: If the ending balance of Income the following:
Summary is a debit, Income Summary
must be credited for the amount of 1. Closing entries - the debit and
the ending balance to be closed and credit entries in the closing entries are
the capital account must be debited. placed here.

Step 4: Transfer the balance of the 2. Post-Closing Trial Balance - the

Drawing Account to the Owner’s amounts in the “Adjusted trial
Capital Account. balance” (or the Income statement
and Balance sheet columns) are cross
- The last closing entry is to close footed with the amounts in the closing
the Drawing (withdrawals) entries columns. The resulting
account. amounts are then placed in the post-
- Drawing is closed into the closing trial balance.
Capital account. Since the
normal balance of the Drawing The amounts in the post-closing trial
account is debit, this account balance will be the beginning
must be credited to close it. balances of accounts in the next
Therefore, the Capital account accounting period.
will be debited in the closing
entry for Drawing.
 After the closing entries have been
made and the accounts ruled, only
balance sheet accounts -assets,
liabilities, and owner’s equity - remain
open. It is desirable to produce
another trial balance to ensure that
the accounts are in balance. This is
known as a post-closing trial balance.