COMPLETING THE ACCOUNTING CYCLE

1. Identification of accountable events to be recorded – This is the process of analyzing the

transactions if they have financial effects on the business. The following steps can be done to
determine if the transaction/event is an accountable event:
a. Check if the transaction/event is a business nature transaction. We can determine that the
transaction is a business nature transaction if it involves a monetary amount. For example, if
the company signed a rental contract, there will be no financial effects/monetary amount
involved unless the company will make payment under the rental contract in which case
there is already an accounting transaction as it will have a monetary transaction to which the
business will incur.
b. Determine what type of accounts they are (Asset – specify; Liabilities – specify; Equity –
specify; Income – specify; Expenses – specify and Drawing account). Knowing what type of
accounts are affected will give you an idea of whether that account will have a debit or a
credit normal balance. Take note if the normal balance of an account is debit, say an asset
account, you will debit this account if it increases and vice versa. Let us again recall the
normal balance of an account:
 ASSET (cash, A/R, N/R, Prepaid expenses) – debit balance
 CONTRA-ASSET (allowance for uncollectible accounts; accumulated depreciation) –
credit balance
 LIABILITY (A/P, N/P, L/P, M/P) – credit balance
 EQUITY (owner’s capital) – credit balance
 INCOME (revenues, gains) – credit balance
 EXPENSES (salaries expense, supplies expense, utilities expense) – debit balance
c. Determine which accounts are going up (increase) or down (decrease) – This can be
accomplished by knowing the normal balance of an account. A business records the
transaction with an entry that has a debit and credit effect (double-entry system). This
double-entry procedure keeps the accounting equation in balance. So, let say, BC, the owner
of calculator business invested cash for P10,000. In analyzing this transaction, first, you have
to determine what type of accounts are affected right? Always remember that in every
transaction, there are at least two accounts affected. Meaning, there will always be a debit
and a credit entry. The reason for this is to make sure that all transactions to be recorded will
be balanced. Imagine, you are sitting on the seesaw alone? 
d. Apply the rules of debits and credits to these accounts. This is the most important step since
here you will now determine if what accounts to be debited and credited. So, make sure you
really understand when to debit and credit an account. As what I’ve mentioned in letter b,
you should know their normal balances so that you will know when to debit or credit that
particular account.
2. Journalizing - This is the process of recording business transactions in the journals (book of original
entry). The bases for recording in the journal are the different business forms such as purchase/sales
invoice, office receipts, delivery receipts, bank statements, bank deposit slips, check vouchers, petty
cash vouchers, credit/debit memo, etc. This is done on a day to day basis.
3. Posting – This is the process of transferring the entries in the journal to the general ledger. Entries in
the general journal are posted to the general ledger on a day to day basis. However, entries in the
special journals (sales journal, purchase journal, cash receipts and cash payments journal) with
separate columns for specific accounts are posted at the end of each month.
4. Preliminary Trial Balance (Unadjusted Trial Balance) – These are prepared to check the accuracy of
posting and to prove the equality of debits and credits. It is prepared every end of the month.
5. Adjusting Entries – These are prepared at the end of the accounting period to update the books. The
items to be adjusted are the transactions which are still unrecorded (accrued income or expense) or
accounts which are under or overstated (prepayments of expenses or pre-collection of income).
 These adjusting entries are recorded in the general journal and they are prepared prior to the
preparation of the financial statements so they can be incorporated or included.
6. Worksheet (Working Paper) – The purpose of preparing the worksheet is merely to facilitate the
preparation of financial statements. This is accomplished by showing the adjustments in the
worksheet and then classifying all the accounts into real/permanent accounts (B/S accounts) and
nominal/temporary accounts (I/S accounts). Preparation of the worksheet is optional.
7. Preparation of F/S – These are the accounting reports prepared at the end of the accounting period.
The principal statements are the Income Statement (now Statement of Financial Performance/Profit
or loss), Statement of Changes in Equity, Balance Sheet (now Statement of Financial Position), and
Statement of Cash Flows. These are the means of communication between the business and the
interested parties. The preparation of the financial statements is the summarizing function of
accounting.
8. Closing Entries – These are entries prepared in the general journal at the end of the accounting
period (after the financial statements are completed) to close all the nominal accounts preparatory to
formally closing the books. This is accomplished by reversing the position of the accounts, i.e.,
accounts with credit balances are debited and accounts with debit balances are credited. An Income
& Expense Summary account is used as balancing account. If the Income & Expense Summary
account will have a credit balance after all the nominal accounts are closed to these accounts, it
means there is a profit, conversely, if it will have a debit balance, it means there is a loss. The balance
of the Income & Expense Summary account will then be closed to the Drawing account of the owner,
and finally whatever will be the balance of the Drawing account, will be closed to the Capital
account of the owner.

If, however, a worksheet is prepared, the Income Statement column in the worksheet will show whether
there is a profit or loss without the benefit of preparing the closing entries. Furthermore, the adjusted
balances of all the nominal accounts are already summarized in the worksheet hence, will serve as the
basis for preparing the closing entries.

After the closing entries are posted to the general ledger, all the nominal accounts will have zero
balances (total debit is equal to the total credits).

9. Post-Closing Trial Balance – this is a trial balance after the closing entries. Considering that the
nominal accounts are already closed, then only the real/permanent accounts will be shown in this
trial balance. All these real accounts which are still open (with balances) are easily found in the
Balance Sheet column of the worksheet instead of looking for the individual accounts in the general
ledger. The post-closing trial balance therefore is a trial balance of all real accounts. This will serve as
the basis for preparing the opening entry in the new books of accounts.
10. Reversing Entries – There are some adjusting entries prepared at the end of the accounting period
which need to be reversed at the start of the new accounting period (in the new general journal).
This is accomplished by simply reversing the adjusting entries made (the debit entry is credit and
the credit entry is debited to reverse the effect on the accounts).

The following adjusting entries need to be reversed:

a. Prepaid expenses if expense method is used
b. Unearned/Deferred income if income method is used
c. Accrued Expenses
d. Accrued Income