FDNACCT 08 · Completing the Cycle

Completing the Cycle

Worksheet: prepare, then record

A worksheet is an optional working paper, not a formal accounting record. A 10-column worksheet has five debit/credit pairs: Trial Balance, Adjustments, Adjusted Trial Balance, Statement of Profit or Loss, and Statement of Financial Position. An 8-column worksheet omits the adjusted-trial-balance pair. Journalize and post worksheet adjustments; still prepare formal statements.

Each stage answers a different question: what the ledger currently reports, what period-end changes are needed, what the corrected balances are, and where they belong in the statements. The worksheet only organizes those calculations; journalizing and posting creates the formal record and updates the ledger. Ten columns means five pairs × two sides, not ten different financial statements.

Same-side adjustments add to a balance; opposite-side adjustments subtract. Net income or loss balances both statement sections and is entered in each smaller column. In profit or loss, credits above debits mean net income. In financial position, debits above credits mean net income before the balancing entry.

For example, profit-or-loss credits of 90,000 and debits of 70,000 give 20,000 net income, entered in the smaller debit column. The same profit enters the financial-position credit column because it increases equity. Adding 90,000 and 70,000 does not measure profit; their difference does.

Periodic inventory

• Remove opening inventory: Dr Income Summary; Cr Merchandise Inventory.

• Establish ending inventory: Dr Merchandise Inventory; Cr Income Summary.

• Ending inventory appears in financial position; beginning and ending inventory both affect cost of sales. These worksheet inventory adjustments do not apply to perpetual inventory.

Beginning inventory joins the cost of goods available this period, while ending inventory identifies goods still unsold. Unsold goods remain an asset and are removed from cost of sales through the Income Summary credit. Record the opening-inventory removal only once across the worksheet and journal process; repeating it would double-count cost.

Present the statements

Net sales = Sales − Sales returns/allowances − Sales discounts.

Cost of sales = Beginning inventory + Purchases − Purchase returns/allowances − Purchase discounts + Freight in − Ending inventory.

Gross profit = Net sales − Cost of sales. The functional-form template separates operating, investing, and financing results. Selling expenses include store/sales staff, advertising and delivery. General/administrative expenses include office costs, legal/accounting fees and doubtful accounts. Miscellaneous expenses are other operating expenses. Interest on notes receivable is investing income; interest on borrowings is financing expense.

Natural form groups expense types, such as salaries and rent; functional form groups purposes, such as selling and administration. The topic outline names both forms, and the Unit 4.9 template illustrates functional grouping.

Ask what activity the cost serves when classifying by function. Delivery of sold goods serves customers and is selling; legal/accounting work supports general administration. Freight in brings purchased merchandise into stock and is included in purchase cost, whereas freight out distributes sold goods and is a selling expense. Loan principal and drawings are not expenses: they change liabilities and equity.

Profit flows into the owner's-equity statement; ending capital flows into financial position. Capital end = Capital beginning + Investments + Profit − Drawings (subtract a loss). Current assets are ordered by liquidity; PPE is shown net of accumulated depreciation.

Profit increases the owner's claim, while drawings remove that claim without being a business expense. The financial-position statement uses ending capital, after both effects, so do not add profit to it again. Contra-assets are deducted from their related assets in the statement even though the trial balance displays their separate credit balances.

Direct cash flows: follow cash, not accrual profit

Operating: customer receipts, merchandise/supplies payments and operating expenses. Investing: buying/selling PPE, lending and collecting non-trade loan principal. Financing: owner investments/drawings, borrowing and repaying borrowing principal. Course convention: interest/dividends received are investing; interest/dividends paid are financing. This classification instruction is specific to these learning materials.

Classification follows the transaction's purpose: ordinary trading is operating, long-term resources and non-trade loans are investing, and owner/borrowed funding is financing. Only actual receipts and payments enter cash flows. A sale on account may earn profit and create a receivable without increasing cash; a loan receipt increases cash and debt without earning revenue.

OIF: complete cash-flow problem

All amounts are Philippine pesos (₱). Beginning cash is 100,000. These are all cash-relevant transactions for the year. Use the direct cash-flow method; amounts described as on account or unpaid are not cash receipts/payments.

Classify each cash receipt/payment as operating, investing, or financing. Calculate each activity’s net cash flow, the change in cash, and ending cash.

OIF: worked results

In workbook OIF: merchandise cash paid = 200,000 × 80% = 160,000; rent collected = 60,000 × 5/6 = 50,000; expenses paid = 42,000 − 8,000 = 34,000; supplies paid = 2,000 × 1/2 = 1,000. Credit sales of 120,000 are not cash receipts. Thus operating = −145,000. Investing = 10,000 loan collection − 40,000 computer = −30,000. Financing = 50,000 investment + 250,000 borrowing − 5,000 drawings = 295,000. Net increase = 120,000; beginning cash 100,000 gives ending cash 220,000. Unused supplies affect accrual expense, not cash paid.

Operating receipts less payments = 50,000 − 160,000 − 34,000 − 1,000 = −145,000. The manager's non-trade loan collection recovers an investment, so it does not enter operating customer receipts; the computer purchase acquires PPE and is also investing. Change in cash is not ending cash: −145,000 − 30,000 + 295,000 = 120,000 change, then 100,000 + 120,000 = 220,000 ending balance.

CCE: complete reconciliation problems

All amounts are Philippine pesos (₱). Amounts labeled “provide” are inflows; amounts labeled “use” are outflows. These are all cash changes. Find the net increase/decrease and ending balance for each independent case.

CCE: worked results

CCE checks: #1 net change −24,000, ending 766,000; #2a net change 200,000, ending 430,000; #2b net change 580,000, ending 810,000.

Use positive signs for cash provided and negative signs for cash used:

• Case 1: 659,000 − 151,000 − 532,000 = −24,000 change; 790,000 − 24,000 = 766,000 ending.

• Case 2a: −190,000 − 280,000 + 670,000 = 200,000 change; 230,000 + 200,000 = 430,000 ending.

• Case 2b: 190,000 − 280,000 + 670,000 = 580,000 change; 230,000 + 580,000 = 810,000 ending.

The two versions of Case 2 differ because operating activity uses cash in 2a but provides it in 2b. Their 380,000 difference is twice 190,000, reflecting the sign change rather than another transaction.

Close, prove, reverse

1. Close credit-balance revenue/cost-of-sales accounts to Income Summary.

2. Close debit-balance expense/cost-of-sales accounts to Income Summary.

3. Close Income Summary to Capital: profit increases capital; loss decreases it.

4. Close Drawings to Capital. Temporary accounts finish at zero.

The post-closing trial balance contains permanent assets, liabilities and capital, with equal debits and credits. Income Summary, revenues, expenses and drawings are absent.

Temporary accounts measure a single period, so closing transfers their result and resets them for the next period. Permanent accounts describe resources and claims that still exist after period-end; Accounts payable and contra-assets remain for that reason. An equal post-closing trial balance confirms debit/credit equality, not that every account or period-end estimate is correct.

Reversing entries begin the next period and reverse selected adjustments: accrued revenues/expenses, unused prepayments originally expensed, and unearned amounts originally recorded as revenue. Do not reverse asset-method prepayments, liability-method unearned revenue, depreciation, doubtful accounts or closing inventory. Reversing simplifies later receipts/payments; it does not cancel the prior period's earned income or expense.

For accrued salaries, the year-end entry is Dr Salaries expense / Cr Salaries payable; the reversal is Dr Salaries payable / Cr Salaries expense. This offset lets a later ordinary cash-payment entry debit expense without counting the prior-period portion twice. The reversal belongs to the new period; the old period retains the expense recognized before closing.

Sources

• FDNACCT Unit 4.8_Preparing worksheet_Study Guide.pdf, pp. 1–2

• FDNACCT_Topics.pdf, sections 3.5.1 and 4.9.1

• FDNACCT Unit 4.9_Financial Statements_1_Statement of Profit or Loss.pdf

• FDNACCT Unit 4.9_Financial Statements_2_Statement of Owner's Equity.pdf

• FDNACCT Unit 4.9_Financial Statements_3_Statement of Financial Position.pdf

• FDNACCT Unit 4.9_Financial Statements_4_Statement of Cash Flows_Study Guide.pdf, pp. 1–2

• FDNACCT Unit 4.9.4_Statement of Cash Flows_Class Exercise.xlsx, OIF; CCE

• FDNACCT Unit 4.10-4.12_Closing entries, Post-closing Trial Balance, Reversing Entries_Study Guide.pdf, pp. 1–2