FINANCIAL ACCOUNTING & REPORTING 3

1
Review of the accounting process

Module 006 Week002- FinAcct3 Review of the

Accounting Process
The purpose of each of the steps in the accounting cycle to this point is to
provide information for this step – preparation of the financial statements.
The adjusted trial balance contains the necessary information. After all, the
financial statements are the primary means of communicating financial
information to external parties.
At the end of the fiscal year, two final steps are necessary, closing the
temporary accounts and preparing a post-closing trial balance.
The closing process serves a dual purpose: (1) the temporary accounts are
reduced to zero balances, ready to measure activity in the upcoming
accounting period, and (2) the temporary account balances are closed to
retained earnings to reflect the changes that have occurred in that account
during the period.

At the end of this module, you will be able to:

1. Prepare the financial statements from the adjusted trial balance
2. Prepare the necessary closing entries and explain the reason for the
entries
3. Prepare the trial balance after closing entries
4. Have a clear understanding of the rationale for reversing entries

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 FINANCIAL ACCOUNTING & REPORTING 3
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Review of the accounting process

Preparation of financial statements

After preparing the adjusted trial balance, the company can now prepare its financial
statements.
Financial statements are the finished products of the accounting process. They present, in
structured form, the effects of transactions completed by the entity during a reporting
period.
A complete set of financial statements includes a statement of financial position, a
statement of comprehensive income, a statement of changes in equity, a statement of cash
flows, and notes and supplementary schedules.
The company prepares its income statement from the revenue and expense accounts. Next,
it derives the retained earnings statements from the retained earnings and dividends
accounts and the net income (or net loss) shown in the income statement.
The company then prepares the balance sheet from the asset and liability accounts, the
common stock account, and the ending retained earnings balance as reported in the
retained earnings statement.

Closing entries

The closing process reduces the balances of nominal (temporary) accounts to zero in order
to prepare the accounts for the next period’s transactions. In the closing process, the income
statement accounts is transferred to a clearing or suspense account called Income Summary.
The Income Summary account matches revenues and expenses.
The company uses this clearing account only at the end of each accounting period. The
account represents the net income or net loss for the period. It then transfers the amount to
an owners’ equity account. In the case of a corporation, the owners’ equity account is
retained earnings. Dividends account are also directly transferred to retained earnings.
All closing entries are posted to the appropriate general ledger accounts. These closing
entries are prepared only at the end of a company’s annual accounting period.
A couple of cautions about preparing closing entries. (1) Avoid unintentionally doubling the
revenue and expense balances rather than zeroing them. (2) Do not close dividends through
the Income Summary account. Dividends are not expenses, and they are not a factor in
determining net income.

Course Module
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Review of the accounting process

Post-closing trial balance

A company may take a third trial balance after posting the closing entries. The trial balance
after closing is called the post-closing trial balance. The purpose of the post-closing trial
balance is to prove the equality of the real (permanent) account balances that the company
carries forward into the next accounting period.
A post-closing trial balance provides evidence that the company has properly journalized
and posted the closing entries. It also shows that the accounting equation is in balance at the
end of the accounting period.
The balance listed in the post-closing trial balance are the opening balance of the balance
sheet accounts for the next reporting period.
The preparation of post-closing trial balance is an optional step in the accounting process.

Reversing entries

After preparing the financial statements and closing the books, a company may reverse some
of the adjusting entries before recording the regular transactions of the next period.
Reversing entries are those that, at the option of the entity are prepared on the first day of
the new accounting period, so that there may be no need to monitor the effects of certain
adjustments in the account balances.
A reversing entry is the exact opposite of the adjusting entry made in the previous period.
Adjusting entries that are subject to reversal (Optional)
 Accrued expense
 Accrued income
 Prepaid expense using the expense method only
 Unearned income using the income method only
Reversing entries do not apply to depreciation and bad debts.

Course Module
 FINANCIAL ACCOUNTING & REPORTING 3
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Review of the accounting process

References and Supplementary Materials

Books and Journals

Valix, C., Peralta, J. & Valix, C.A; 2016; Financial Accounting Volume 3; Metro Manila,
Philippines; GIC Enterprises & Co., Inc.

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield; 2013; Intermediate Accounting;

United States; John Wiley & Sons, Inc.

Online Supplementary Reading Materials

Review of Accounting Cycle;
https://facweb.northseattle.edu/rwoods/ACC251_Folder/Ch02ReviewofAccountingCycle
.htm; October 30, 2017

A Review of the Acounting Cycle; http://www.clinton.edu/repository/5649.pdf; October

30, 2017

Online Instructional Videos

The Accounting Cycle;
https://www.bing.com/videos/search?q=review+of+accounting+cycle&&view=detail&mid
=E3695079CD4D48B38840E3695079CD4D48B38840&FORM=VRDGAR; January 10, 2018

Intermediate Accounting I (Review of the Accounting Process 1);

https://www.bing.com/videos/search?q=review+of+accounting+cycle&&view=detail&mid
=305EC4D5EC5D9F95AC6F305EC4D5EC5D9F95AC6F&FORM=VRDGAR; January 10, 2018

Course Module