Chapter 6

Accounting Cycle for Service Business

Learning Outcomes

At the end of this chapter, the learner is expected to:

• illustrate the steps in accounting cycle

• describe the nature of transactions in a service business
• record transactions of a service business in the general journal
• post transactions in the ledger
• prepare a trial balance
• prepare adjusting entries
• complete the accounting cycle of a service business

Steps in the Accounting Cycle

The following are the basic steps in the accounting cycle.

1. Journalizing Transactions
2. Posting Entries to the Ledger
3. Preparation of Unadjusted Trial Balance
4. Preparation of Adjusting Entries
5. Preparation of Worksheet
6. Preparation of Basic Financial Statements
7. Journalizing Post Closing Entries
8. Preparation of Post-Closing Trial Balance

Step 1 – Journalizing Transactions

Journalizing refers to the process of recording transactions in journals. Journals are

called books of original entry because they are the records in which transactions are first
recorded. It involves the writing down of business transaction in a systematic manner and in
order of their occurrence in the journal. This refers to recording.

The entry that is made in the journal is called journal entry. A journal entry may be
simple or compound. A simple journal entry is one that has one debit item with a debit amount
and one credit item with a credit amount. While, a compound journal entry is one that may have
one debit item and two or more credit items, two or more debit items and one credit item or may
have two or more items on both sides.

There are different designs of journals, but in this chapter, only the general journal or the
two-column journal form is used.
Guidelines in Journalizing Transactions

1. An entry to be considered complete must consists of the date, debit and credit account
titles, debit and credit amounts, and brief explanation.
2. The date includes the year and month when a transaction occurred.
3. The debit account is written at the extreme left while the credit account is indented one-
half inch to the right. All debit accounts are written first before all credit accounts.
4. The explanation should be brief and concise. It is indented one inch to the right.
5. Proper use of money columns must be observed. It may be noted that when there are no
centavos, you can put number zero (0) on the space provided, or may be left blank or
with a dash (-).
6. The peso sign must be written before the first amount in a money column. For the
remaining amounts, it needs not to be written anymore because it is understood that all
the succeeding amounts are in pesos.

Proper use of money columns is shown below:

7. Leave a space after each entry to separate it from the next one.
8. The debit and credit columns need not be totalled. The reason for this is that for each
transaction, total debit and total credit amounts are equal. However, they may be
required for control purposes.
9. Erasures should be avoided. Instead of erasing a word, sentence or amount, cross it out
by drawing a straight line over it. Write the correct word or figure immediately on top.
10. The post reference or P.R. that shows the number of an account in a ledger or page of
a ledger to which it was transferred must be written correctly.

Step 2 – Posting Entries to the Ledger

Posting means transferring the amounts from the journal to the appropriate accounts in
the ledger. A general ledger is where the entries are posted. It is considered as the book of final
entry. It contains complete collection of all accounts of a company. Each account has an
assigned account number and the individual accounts are arranged in numerical sequence in
the following order: assets, liabilities, capital, drawing or withdrawal, revenue and expenses.
Debits in the journal are posted as debits in the ledger, and credits in the journal as credits in
the ledger.

The transfer of entries from the journal to the ledger is actually the sorting process which
means putting each value in a certain place according to its kind, class or nature. This refers to
classifying.
 There are two forms of general ledger being used in practice. These are the two-column
type and the three-column type ledgers. The advantage of a three-column type ledger is that the
balance of the account is shown after each item has been posted.

Steps in the Posting Process

1. Enter the date of the journal entry.

2. Item column is usually blank.
3. Enter journal letter and page number in post reference or P. R. column.
4. Enter the debit or credit amount.
5. Compute the new account balance.
6. Enter the account number in the general journal post reference or P.R. column.
7. Repeat steps 1-6 in the remaining transactions in the journal.

After posting all the journal entries to the ledger, the amount of debit and credit are being
totalled and usually done at the end of each month. This is called footing. Footing is the process
of adding each of the two amount columns of an account or item in the general ledger and
finding their balances thereof.

Step 3 – Preparation of Unadjusted Trial Balance

To prove the equality of debits and credits, a trial balance should be prepared. A trial
balance is a listing of the ledger accounts and their balances in the ledger that aids in proving
the equality of the debits and credits.

As stated earlier, the ledger accounts are footed and the balances are extracted. The
balance may either be a debit or a credit balance. Debit balance is the excess of debit postings
over the credit postings to an account while, a credit balance is the excess of credit postings
over the debit postings to an account. The balances are listed in two-column form and are
totalled. If the totals are equal, the trial balance is said to be balanced.

The accounts in the trial balance are listed in this order according to their account
numbers:
a. Assets (arranged according to their liquidity)
b. Liabilities
c. Capital
d. Drawing
e. Revenue
f. Expenses
Shown below is an example of a trial balance:

Even though the trial balance indicates that the ledger is in balance, the ledger can be
still contain errors. For example, if a journal entry was made debiting or crediting the wrong
accounts, or if an item was posted to the wrong account, the ledger will still be in balance. It is
important, therefore, to be very careful in preparing the journal entries and in posting them to the
ledger accounts.

Errors not Detected in a Trial Balance

Although a trial balance is already balanced, there may be errors that can remain
undetected. These are errors that do not affect the equality between the debits and the credits.
Examples are the following:

a. Omission of an entry in the general journal

b. Duplication of entries in the general journal
c. Wrong entry made in the general journal
d. Failure to post an entire entry to the general ledger
e. Posting the correct amount on the correct side but on the wrong account
f. Duplication of postings

Step 4 – Preparation of Adjusting Entries

Adjusting entries are made at the end of the period to assign revenues to the period in
which they are earned and expenses to the period in which they are incurred. Many accounts
need adjustments to reflect the current conditions as of time of reporting in order for the
statements to be meaningful. There may be financial data not previously recognized that need
to be recorded to make the books of accounts up to date like the expenses already incurred but
no payment until sometime in the subsequent period, and revenues already earned but no cash
is collected yet. Other transactions like prepayments of expenses may result to over statement
of expenses if the unused portion is not adjusted. Adjusting entries, therefore, bring the assets,
liabilities, revenue and expenses to their correct balances.

Reasons of Preparing Adjusting Entries

a. To accurately report the assets on the balance sheet date that some may have been
used up during the accounting period
b. To accurately report the liabilities on the balance sheet date for their may be expenses
already incurred but not yet paid
c. To report all revenues earned during the accounting period
d. To report all expenses incurred to produce the revenues during the accounting period

Items that Need Adjustments

There are five common items that need to be adjusted at the end of the period. These are
the following:

1. Accrued Expenses – these are expenses that have been incurred but not yet paid in
cash.

2. Accrued Revenues – these are revenues that have been earned but not yet received in
cash.

3. Prepaid Expenses – these are expenses that have been paid but will typically expire or
get used up in the near future.

4. Unearned Revenues – these are revenues collected in advance from customers but
corresponding service or product to be provided in the future.

5. Depreciation Expense – this is the expense associated with allocating or spreading the
cost of property and equipment over their useful life.

Step 5 – Preparation of Worksheet

Worksheet or working paper is a columnar sheet used as a tool or bridge connecting the
Trial Balance and Financial Statements. Its purpose is to determine the performance or results
of the operation and financial condition of the enterprise in a fast manner even before adjusting
and closing entries can be recorded in the general journal.

The preparation of the worksheet is optional which means that it may or may not be
prepared at all because financial statements can already be prepared even by just looking at the
trial balance.
The Ten-Column Worksheet

The accounts listed on the far left of the work sheet are taken from the ledger. The rest
of the worksheet has five sections with two columns each trial balance, adjustments, adjusted
trial balance, income statement and the balance sheet.

Procedures in Preparing a Worksheet

1. Prepare the Trial Balance. Write the heading, account titles, and the debit and credit
amounts from the general ledger. Single rule the Trial Balance columns and total the
debit and credit columns. Double rule the columns to show they are equal.

2. Prepare the Adjustments. Record the adjustments. Add new accounts that did not have
balances before adjusting. Single rule the adjustments columns and total the debit and
credit columns. Double rule the columns to show equality.

3. Prepare the Adjusted Trial Balance. Extend those debits and credits that are not
adjusted. Enter the adjusted balances in the appropriate adjusted trial balance columns.
Single rule the adjusted trial balance columns. Total the debit and credit columns and
double rule columns to show equality.

4. Extend adjusted balances to the Income Statement and Balance Sheet Columns. Extend
all the revenue and expense accounts to the Income Statement columns. Extend the
assets and drawing accounts to the Balance Sheet Debit column. Extend the liabilities
and owner’s capital accounts to the Balance Sheet Credit column.

5. Complete the Worksheet. Rule and total the Income Statement and Balance Sheet
columns. Calculate the difference between the Income Statement Debit and Credit
columns. If the Income Statement Credit column is larger, a net income has occurred. If
not, a net loss has occurred. Calculate the difference between the Balance Sheet Debit
and Credit columns. Add the net income to the Income Statement Debit column and to
the Balance Sheet Credit column. If net loss, add it to the Income Statement Credit
column and to the Balance Sheet Debit column. Total and rule the columns.
Step 6 – Preparation of Basic Financial Statements

Financial Statements represent a formal record of the financial activities of an entity.

These are written reports that quantify the financial strength, performance and liquidity of a
company. Financial statements reflect the financial effects of business transactions and events
on the entity. The basic financial statements that will be discussed and used in this book are the
following:

a. Statement of Financial Performance or Income Statement

b. Statement of Changes in Owner’s Equity
c. Statement of Financial Position or Balance Sheet

Statement of Financial Performance or Income Statement

It is a financial statement which shows the performance of the enterprise for a given
period of time. It shows the summary of income and expenses derived from and incurred for a
given period.

Statement of Changes in Owner’s Equity

It is a financial statement that summarizes the changes that occurred in owner’s equity.
The beginning equity of the owner is increased by the additional investment and profit.
Correspondingly, it is decreased by withdrawal and loss.
Statement of Financial Position or Balance Sheet

It is a financial statement that shows the financial position or condition of an enterprise

as of particular date. It lists all the assets, liabilities and owner’s equity of an entity as a specific
date, usually at the end of the month or year.

On the Statement of Financial Position or Balance Sheet, assets and liabilities are
classified as either current or non-current to indicate their relative liquidity. Liquidity is a
measure of how quickly an item can be converted to cash.

Company Name
Balance Sheet
January 31, 2017
ASSETS
Current Assets
Cash ₱1,000,000.00
Accounts Receivable ₱700,000.00
Less: Allowance for Doubtful Accounts 300,000.00 400,000.00
Supplies 600,000.00
Total Current Assets 2,000,000.00
Non-Current Assets
Furniture and Equipment 4,000,000.00
Less: Accumulated Depreciation 1,000,000.00 3,000,000.00
Transportation Equipment 9,000,000.00
Less: Accumulated Depreciation 2,000,000.00 7,000,000.00
Total Non-Current Assets 10,000,000.00
TOTAL ASSETS ₱12,000,000.00

LIABILITIES AND OWNER'S EQUITY

Current Liability
Accounts Payable ₱2,000,000.00
Owner's Equity
Owner’s Capital 10,000,000.00
TOTAL LIABILITIES AND OWNER'S EQUITY ₱12,000,000.00
Step 7 – Journalizing Post Closing Entries

Closing Entries are usually prepared at the end of the accounting period. Not all
accounts are closed. Only the nominal accounts, often called temporary accounts, and the
drawing account are closed at the end of an accounting period. Nominal accounts are accounts
that appear in the income statement like revenue and expense account. While, the real
accounts, often called permanent accounts, are held open. These accounts appear in the
balance sheet.

Procedures in closing the Nominal Accounts

1. Close the Income account or Revenue account to Income Summary.

2. Close all expense accounts to Income Summary. Since expenses have debit balances,
to close is to credit the said accounts.

3. Close the balance to Capital account. The Income Summary account summarizes the
revenues and expenses for the period. If total credits are greater than total debits, it
indicates income from operation.

4. Close drawing to Capital account.

Step 8 – Preparation of Post-Closing Trial Balance

After posting the closing entries to the general ledger another trial balance is prepared.
This time, the accounts left with balances are all real accounts because all nominal accounts
including the drawing accounts have zero balances.

The post-closing trial balance is prepared to check the equality of the accounting
equation before the balances of assets, liabilities and capital are forwarded to the next
accounting period. This is the end of the accounting cycle.

Reversing Entries

Reversing Entries are no longer part of the accounting cycle because these are
prepared at the beginning of the next accounting period. The objective of these entries is to
reverse the adjusting entry made on accruals of revenue and expenses. Only adjusting entries
on accruals of income and expense and adjustments on prepayments of income and expense
that use nominal approach of recording prepayment are to be reversed.

Nature of Service Business

Service is a form of business providing different types of labor services in a wide variety
of business sectors. It offers intangible products such as accounting, banking, cleaning,
consultancy, education, insurance, expertise, medical treatment, or transportation. No transfer
of possession or ownership takes place when services are sold. Services cannot be stored or
transported, instantly perishable, and come into existence at the time they are bought and
consumed.
The Major Types of Business Transactions of a Service Entity

a. Operating Transactions - are day-to-day business activities of a company which determine

the company's net income or loss.

Examples:

• Revenue from services rendered on cash or credit basis

• Purchase or payment of expenses
• Receipt of interest income

b. Investing Transactions - consist of buying and selling long-term assets and other
investments.

Examples:

• Purchase of land, building, equipment, tools and other long-term investments on

cash or credit basis
• Sale of land, building, equipment, tools and other long-term investments on cash or
credit basis

c. Financing Transactions - are transactions or business events that affect long-term

liabilities and equity.

Examples:

• Investment by owner(s)
• Withdrawals by owner(s)
• Borrowings or loans
• Payment of borrowings or loans

Illustrative Problem of a Service Business

The following is the Chart of Accounts of Hernandez Beauty Salon:

Hernandez Beauty Salon

Chart of Accounts

Current Assets
101 Cash
102 Accounts Receivable
103 Supplies

Non-current Assets
111 Furniture and Fixtures
112 Accumulated Depreciation – Furniture and Fixtures
113 Machinery and Equipment
114 Accumulated Depreciation – Machinery and Equipment
Current Liabilities
201 Accounts Payable

Owner’s Equity
301 Hernandez, Capital
302 Hernandez, Drawing
303 Income Summary

Income
401 Service Revenue

Expenses
501 Supplies Expense
502 Salaries Expense
503 Utilities Expense
504 Taxes and Licenses
505 Rental Expense
506 Depreciation Expense

Ms. Mary Hernandez decided to start a beauty salon business. She named it after her
surname, Hernandez Beauty Salon. The following are the transactions for the month of
February 2017:

Feb. 1 Ms. Hernandez invested the following:

a. Cash, ₱400,000
b. Furniture and fixtures with a fair value of ₱1,000,000
c. Machinery and equipment with a fair value of ₱2,000,000

2 Bought supplies from Ilagan Company for cash worth ₱70,000.

4 Paid cash to the Department of Trade and Industry for the registration fee and
other licenses to the government, ₱4,000.

7 Rendered beauty services on account to the customers, ₱100,000.

10 Collected ₱80,000 from customer’s accounts.

12 Purchased supplies from Ilagan Company on credit, ₱12,000.

17 Rendered service for cash worth ₱200,000.

20 Collected the remaining unpaid balance worth ₱20,000 from the customer.

23 Paid the purchased supplies from Ilagan Company, ₱12,000.

26 Withdrew ₱10,000 for personal use of Ms. Hernandez.

28 Paid the following expenses:

Salaries for the month ₱18,000
Light and water bills 4,700
Taxes and licenses 8,300
 Rent expense 10,000

Step 1 – Journalizing Transactions

General Journal
GJ - 1
Date Particulars PR Debit Credit
2017
Feb 1 Cash ₱ 4 0 0 0 0 0
Furniture and Fixtures 1 0 0 0 0 0 0
Machinery and Equipment 2 0 0 0 0 0 0
Hernandez, Capital ₱3 4 0 0 0 0 0
Investment of Ms. Hernandez.

2 Supplies 7 0 0 0 0
Cash 7 0 0 0 0
Purchased of supplies.

4 Taxes and Licenses 4 0 0 0

Cash 4 0 0 0
Payment of fees and licenses.

7 Accouunts Receivable 1 0 0 0 0 0
Service Revenue 1 0 0 0 0 0
Rendered services on acccount.

GJ - 2

Date Particulars PR Debit Credit

2017
Feb 10 Cash ₱ 8 0 0 0 0
Accounts Receivable ₱ 8 0 0 0 0
Payment of customers.

12 Supplies 1 2 0 0 0
Accounts Payable 1 2 0 0 0
Purchased supplies on account.

17 Cash 2 0 0 0 0 0
Service Revenue 2 0 0 0 0 0
Rendered service for cash.
 20 Cash 2 0 0 0 0
Accounts Receivable 2 0 0 0 0
Payment of customers.

23 Accounts Payable 1 2 0 0 0
Cash 1 2 0 0 0
Payment to Ilagan Company.

26 Hernandez, Drawing 1 0 0 0 0
Cash 1 0 0 0 0
Withdrawal of Ms. Hernandez.

28 Salaries Expense 1 8 0 0 0
Utilities Expense 4 7 0 0
Taxes and licenses 8 3 0 0
Rent Expense 1 0 0 0 0
Cash 4 1 0 0 0
Payment of various expenses.

Step 2 – Posting Entries to the Ledger

After recording the transactions, the next step is posting the entries from the journals to
the General Ledger.

Cash 101
Date PR Debit Date PR Credit
2017 2017
Feb. 1 GJ1 ₱ 4 0 0 0 0 0 Feb 2 GJ1 ₱ 7 0 0 0 0
10 GJ2 8 0 0 0 0 4 GJ1 4 0 0 0
17 GJ2 2 0 0 0 0 0 23 GJ2 1 2 0 0 0
20 GJ2 2 0 0 0 0 26 GJ2 1 0 0 0 0
28 GJ2 4 1 0 0 0
₱ 5 6 3 0 0 0

Accounts Receivable 102

Date PR Debit Date PR Credit
2017 2017
Feb 7 GJ1 ₱ 1 0 0 0 0 0 Feb 10 GJ2 ₱ 8 0 0 0 0
20 GJ2 2 0 0 0 0
 Supplies 103
Date PR Debit Date PR Credit
2017
Feb 2 GJ1 ₱ 7 0 0 0 0
12 GJ2 1 2 0 0 0

₱ 8 2 0 0 0

Furniture and Fixtures 111

Date PR Debit Date PR Credit
2017
Feb. 1 GJ1 ₱1 0 0 0 0 0 0

Accumulated Depreciation – F & F 112

Date PR Debit Date PR Credit

Machinery and Equipment 113

Date PR Debit Date PR Credit
2017
Feb. 1 GJ1 ₱2 0 0 0 0 0 0

Accumulated Depreciation – M & E 114

Date PR Debit Date PR Credit

Accounts Payable 201

Date PR Debit Date PR Credit
2017 2017
Feb 23 GJ2 ₱ 1 2 0 0 0 Feb 12 GJ2 ₱ 1 2 0 0 0
 Hernandez, Capital 301
Date PR Debit Date PR Credit
2017
Feb 1 GJ1 ₱3 4 0 0 0 0 0

Hernandez, Drawing 302

Date PR Debit Date PR Credit
2017
Feb 26 GJ1 ₱ 1 0 0 0 0

Income Summary 303

Date PR Debit Date PR Credit

Service Revenue 401

Date PR Debit Date PR Credit
2017
Feb 7 GJ1 ₱ 1 0 0 0 0 0
17 GJ2 2 0 0 0 0 0

₱ 3 0 0 0 0 0

Supplies Expense 501

Date PR Debit Date PR Credit

Salaries Expense 502

Date PR Debit Date PR Credit
2017
Feb 28 GJ2 ₱ 1 8 0 0 0
 Utilities Expense 503
Date PR Debit Date PR Credit
2017
Feb 28 GJ2 ₱ 4 7 0 0

Taxes and Licenses 504

Date PR Debit Date PR Credit
2017
Feb 4 GJ2 ₱ 4 0 0 0
28 GJ2 8 3 0 0

₱ 1 2 3 0 0

Rental Expense 505

Date PR Debit Date PR Credit
2017
Feb 28 GJ2 ₱ 1 0 0 0 0

Depreciation Expense 506

Date PR Debit Date PR Credit
 Step 3 – Unadjusted Trial Balance

A trial balance is then prepared observing the debit and credit account balances in the
General Ledger.

Hernandez Beauty Salon

Trial Balance
February 28, 2017

101 Cash ₱563,000.00

103 Supplies 82,000.00
111 Furniture and Fixtures 1,000,000.00
113 Machinery and Equipment 2,000,000.00
301 Hernandez, Capital ₱3,400,000.00
302 Hernandez, Drawing 10,000.00
401 Service Revenue 300,000.00
502 Salaries Expense 18,000.00
503 Utilities Expense 4,700.00
504 Taxes and Licenses 12,300.00
505 Rental Expense 10,000.00

TOTALS ₱3,700,000.00 ₱3,700,000.00

Step 4 – Adjusting Entries

Other information at the end of the month:

1. Furniture and Fixtures has an estimated life of 4 years with a salvage value of ₱40,000.

Depreciation Expense (₱1,000,000-40,000/4 x 1/12) ₱20,000

Accumulated Depreciation – F & F ₱20,000

2. Machinery and Equipment has an estimated life of 5 years with a salvage value of
₱200,000 at the end of its life.

Depreciation Expense (₱2,000,000-200,000/5 x 1/12) ₱30,000

Accumulated Depreciation – M & E ₱30,000

3. The supplies worth ₱32,000 have been used up.

Supplies Expense ₱32,000

Supplies ₱32,000

The journal entries are formally recorded in the General Journal. Adjusting entries are
also posted to the General Ledger.
 Step 5 – Worksheet
Hernandez Beauty Salon
Worksheet
For the month ended February 28, 2017
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Titles
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Cash 563,000.00 563,000.00 563,000.00

Accounts Receivable

Supplies 82,000.00 32,000.00 50,000.00 50,000.00

Furniture and Fixtures 1,000,000.00 1,000,000.00 1,000,000.00

Accumulated Depreciation - F & F 20,000.00 20,000.00 20,000.00

Machinery and Equipment 2,000,000.00 2,000,000.00 2,000,000.00

Accumulated Depreciation - M & E 30,000.00 30,000.00 30,000.00

Accounts Payable

Hernandez, Capital 3,400,000.00 3,400,000.00 3,400,000.00

Hernandez, Drawing 10,000.00 10,000.00 10,000.00

Income Summary

Service Revenue 300,000.00 300,000.00 300,000.00

Supplies Expense 32,000.00 32,000.00 32,000.00

Salaries Expense 18,000.00 18,000.00 18,000.00

Utilities Expense 4,700.00 4,700.00 4,700.00

Taxes and Licenses 12,300.00 12,300.00 12,300.00

Rental Expense 10,000.00 10,000.00 10,000.00

Depreciation Expense 50,000.00 50,000.00 50,000.00

3,700,000.00 3,700,000.00 82,000.00 82,000.00 3,750,000.00 3,750,000.00 127,000.00 300,000.00 3,623,000.00 3,450,000.00

Profit 173,000.00 173,000.00

TOTALS 300,000.00 300,000.00 3,623,000.00 3,623,000.00

 Step 6 – Financial Statements

Income Statement. It is a financial statement which shows the performance of the

enterprise for a given period of time. Shown below is the Income Statement of Hernandez
Beauty Salon for the month ended February 28, 2017:

Hernandez Beauty Salon

Income Statement
February 28, 2017

Service Revenue ₱300,000.00

Less: Operating Expenses
Supplies Expense ₱32,000.00
Salaries Expense 18,000.00
Utilities Expense 4,700.00
Taxes and Licenses 12,300.00
Rental Expense 10,000.00
Depreciation Expense 50,000.00 127,000.00

PROFIT ₱173,000.00

Statement of Changes in Equity. It is a financial statement that summarizes the

changes that occurred in owner’s equity. Shown below is the Statement of Changes in Owner’s
Equity of Hernandez Beauty Salon for the month ended February 28, 2017:

Hernandez Beauty Salon

Statement of Changes in Equity
For the month ended February 28, 2017

Hernandez, Capital – Beginning ₱3,400,000.00

Add: Profit 173,000.00

Balance 3,573,000.00

Less: Withdrawal 10,000.00

Hernandez, Capital – End ₱3,563,000.00

 Balance Sheet. It is a financial statement that shows the financial position or condition
of an enterprise as of particular date. Shown below is the Balance Sheet of Hernandez Beauty
Salon as of February 28, 2017:

Hernandez Beauty Salon

Balance Sheet
February 28, 2017

ASSETS

Current Assets
Cash ₱563,000.00
Supplies 50,000.00
Total Current Assets 613,000.00
Non-Current Assets
Furniture and Equipment ₱1,000,000.00
Less: Accumulated Depreciation 20,000.00 980,000.00
Transportation Equipment 2,000,000.00
Less: Accumulated Depreciation 30,000.00 1,970,000.00
Total Non-Current Assets 2,950,000.00

TOTAL ASSETS ₱3,563,000.00

LIABILITIES AND OWNER'S EQUITY

Owner's Equity
Hernandez, Capital ₱3,563,000.00

TOTAL LIABILITIES AND OWNER'S EQUITY ₱3,563,000.00

Step 7 – Closing Entries

The preparation of closing entries is the seventh step of the accounting process. Like
adjusting entries, closing entries are usually prepared at the end of the accounting period of one
year. Closing the books at the end of the period is only a compliance with the accounting
requirements. As a reminder, only nominal accounts are closed while the real accounts are not
because these are being carried forward to the next accounting period. The closing entries of
Hernandez Beauty Salon is prepared and presented below comprising the following steps:

Step1: Close the Service Revenue to Income Summary account.

Service Revenue ₱300,000.00

Income Summary ₱300,000.00
To close Service Revenue.
Step 2: Close the expense accounts to Income Summary account.

Income Summary ₱127,000.00

Supplies Expense ₱32,000.00
Salaries Expense 18,000.00
Utilities Expense 4,700.00
Taxes and Licenses 12,300.00
Rental Expense 10,000.00
Depreciation Expense 50,000.00
To close expense accounts.

Step 3: Close net income to Capital account.

Income Summary ₱173,000.00

Hernandez, Capital ₱173,000.00
To close net income to capital.

Step 4: Close withdrawal to Capital account.

Hernandez, Capital ₱10,000.00

Hernandez, Drawing ₱10,000.00
To close withdrawal to capital.

The above closing entries and formally recorded in the General Journal and posted to their
respective General Ledger. After closing entries are journalized and posted, nominal accounts
would have zero balance.

Step 8 – Post-Closing Trial Balance

After journalizing and posting closing entries, post-closing trial balance is prepared to
test or check the equality of debit and credit amounts. Shown below is the Post-Closing Trial
Balance of Hernandez Beauty Salon as of February 28, 2017:

Hernandez Beauty Salon

Post-Closing Trial Balance
February 28, 2017

101 Cash ₱563,000.00

103 Supplies 50,000.00
111 Furniture and Fixtures 1,000,000.00
112 Accumulated Depreciation – F & F ₱20,000.00
113 Machinery and Equipment 2,000,000.00
114 Accumulated Depreciation – M & E 30,000.00
301 Hernandez, Capital 3,563,000.00
TOTALS ₱3,613,000.00 ₱3,613,000.00