THE ACCOUNTING CYCLE  A chart of accounts lists all accounts used by the

company.
1. Analyze business transactions
 Transactions are the exchange of goods or services
between entities, as well as other events that have
an economic impact on a business.
 Business transaction is an economic event that
causes a change in the financial position
2. Journalize the transactions
 This is the process of recording business
transactions in a journal.
 Journal – called book of original entry
 accounting record in which business transactions are
entered in chronological order
 Journal entries record transaction information; 4. Prepare a trial balance
debits equal credits.  Determine the account balance for each T-Account.
General Journal Entry Format  A Trial Balance is a listing of all account balances. It
Date Debit Entry.................................. proves the equality of the debits and the credits in
xx the general ledger.
Credit Entry............................. xx
Explanation.

5. Journalize and post adjusting entries

Illustration: Journal Entry  Adjusting entries are required at the end of each
accounting period for accrual-basis accounting, prior
On January 1 of the current year, Mr. P. Rodriguez to preparing the financial statements. The purpose
opened a tailoring shop which he named “PR Tailoring”. for adjusting entries are to:
He invested cash, ₱25,000 and sewing equipment,  Bring balance sheet accounts current.
₱100,000 in the business.  Reflect proper amounts of revenues and expenses
on the income statement.
Tips regarding Adjusting Entries
 Analytical Process. You must determine what
original entry was made (if any) and what the
ending balances should be before you know what
adjusting entry to make. You cannot memorize
adjusting entries.
 Adjusting entries always incorporate a balance sheet
account and an income statement account.
3. Post to ledger accounts  Adjusting entries never involve a cash account.
 Posting is the process of transferring amounts from Most common Adjusting Entries
the journal to the general ledger.  Accrued Revenues--Revenues that have been earned
 A ledger is a book of accounts in which data from but not yet recorded.
transactions recorded in the journals are posted, Example:
classified, and summarized. It is also called the book A tenant who occupies the right side of the shop
of final entry. space, is two months in arrears as of the balance
sheet date. His monthly rental is ₱2,500 per month.
 Adjusting Entry: D. Statement of Cash Flows - basic component of
Accrued Rent Income ₱5,000 the financial statements which summarizes the
Rent Income ₱5,000 operating, investing and financing activities of an
To record accrued rent income. entity
 Unearned Revenues--Revenues that have been E. Notes, comprising a summary of significant
recorded but not yet earned. accounting policies and other explanatory notes
 Accrued Expenses--Expenses that have been
incurred but not yet recorded. 8. Journalize and post closing entries
 Office employees are paid every two weeks. On  Real accounts are permanent accounts not closed to
December 31, five days’ salaries of an office a zero balance at the end of the accounting period.
employee for ₱300 per day have accrued. These accounts are carried forward to the next
Adjusting Entry: period.
Salary Expense ₱1,500  Nominal accounts are temporary accounts that are
Accrued Salaries ₱1,500 closed to a zero balance at the end of each
Five-day accrued salaries accounting period.
of an employee for ₱300/day.  Closing entries reduce all nominal accounts to a zero
 Prepaid Expenses--Expenses that have been balance.
recorded but not yet incurred.
6. Prepare adjusted trial balance PURPOSE OF CLOSING ENTRIES
 After the adjusting entries have been recorded in  Updates the owner’s capital account in the ledger by
the general journal, they should be posted to the transferring net income (loss) and owner’s drawings
ledger to adjust the accounts. to owner’s capital.
 After accounts have been posted, an adjusted trial  Prepares the temporary accounts (revenue, expense,
balance should be prepared to prove the accuracy of drawings) for the next period’s postings by reducing
the postings to the general ledger. their balances to zero.

 WORK SHEET
 A work sheet is a multiple-column form that may be TEMPORARY PERMANENT (REAL)
(NOMINAL) These accounts are
used in the adjustment process and in preparing
These accounts are not closed
financial statements.
closed
 It is a working tool or a supplementary device for All revenue accounts All asset accounts
the accountant and not a permanent accounting All expense accounts All liability accounts
record. Owner’s drawings Owner’s capital account
 Use of a work sheet should make the preparation of (Income Statement / (Balance Sheet
adjusting entries, financial statements easier. Drawings Accounts) Accounts)

7. Prepare Financial Statements 9. Prepare post-closing trial balance

 After the accounts have been adjusted and  After all closing entries have been journalized and
worksheet has been constructed, financial posted, a post-closing trial balance is prepared.
statements are prepared.  The purpose of this trial balance is to prove the
 From the worksheet, the income statement can be equality of the permanent (balance sheet) account
prepared by referring to the income statement balances that are carried forward into the next
columns and the balance sheet columns of the accounting period.
worksheet
Components of Financial Statements:
A. Statement of Financial Position/Balance Sheet
- formal statement showing the 3 elements
comprising financial position, namely assets,
liabilities and equity
B. Income Statement - formal statement showing
the financial performance of an entity for a given
period of time
C. Statement of Changes in Equity - basic
statement that shows the movements in the
elements or components of the shareholder’s equity
 b. Accounts receivable
Types of Major Accounts c. Allowance for bad debts
 An account is the basic storage of information in d. Notes receivable
accounting. It is a record of the increases and e. Prepaid supplies
decreases in a specific item of asset, liability, equity, f. Prepaid rent
income or expense. g. Prepaid insurance
h. Land
The T-Account i. Building
j. Accumulated depreciation - Building
k. Equipment
l. Accumulated depreciation - equipment

LIABILITIES

a. Accounts payable
b. Notes payable
c. Interest payable
d. Salaries payable
e. Utilities payable
f. Unearned

EQUITY
The Five Major Accounts a. Owner’s capital (or Owner’s equity)
1. ASSETS – are the resources you control that have b. Owner’s drawings
resulted from past events and can provide you with
future economic benefits.  INCOME STATEMENT ACCOUNTS
2. LIABILITIES – are your present obligations that
have resulted from past events and can require you INCOME
to give up resources when settling them.
a. Service fees
3. EQUITY – is assets minus liabilities.
b. Sales
4. INCOME – are increases in economic benefits
c. Interest income
during the period in the form of inflows or
d. Gains
enhancements of assets or decreases of liabilities
that result in increases in equity, other than those EXPENSES
relating to investments by the business owners.
5. EXPENSES – are decreases in economic benefits a. Cost of sales (or Cost of goods sold)
during the period in the form of outflows or b. Freight-out
depletions of assets or increases of liabilities that c. Salaries expense
result in decreases in equity, other than those d. Rent expense
relating to distributions to the business owners. e. Utilities expense
f. Supplies expense
Classification of the Five Major Accounts g. Bad debt expense
h. Depreciation expense
i. Advertising expense
j. Insurance expense
k. Taxes and licenses
l. Transportation and travel expense
m. Interest expense
n. Miscellaneous expense
Chart of Accounts - A chart of accounts is a list of o. Losses
all the accounts used by a business.

Common Account Titles

• BALANCE SHEET ACCOUNTS
ASSETS
a. Cash
Books of Accounts and Double-entry System
Formats of the Ledgers
The Books of Accounts

1. Journal (General and Special) - The journal, also

called the “book of original entries,” is the
accounting record where business transactions are
first recorded.
 Special Journal – is used to record transactions with
similar nature (e.g., Sales journal, Purchases journal,
Cash receipts journal, and Cash disbursements
journal) Double-entry System
 General Journal – All other transactions that cannot  Concept of duality – each transaction is recorded
be recorded in the special journals are recorded in in two parts – debit and credit
the general journal.  Concept of equilibrium – each transaction is
recorded in terms of equal debits and credits.
2. Ledger (General and Subsidiary) - The ledger is used
to classify the effects of business transactions on the Normal balances of accounts
accounts. It is also called the “book of final
entries.”
 General ledger – contains all the accounts appearing
in the trial balance.
 Subsidiary ledger – provides a breakdown of the
balances of controlling accounts.

Format of the General Journal

Contra and Adjunct accounts

 Contra accounts are presented in the financial

statements as deduction to their related accounts.
 Adjunct accounts are presented in the financial
statements as addition to their related accounts.
Business Transactions & Their Analysis

Steps in the Accounting cycle

1. Identifying and analyzing - Only accountable

events are recorded. Accountable events are
those that affect the assets, liabilities, equity,
income or expenses of the business.
 Accountable events are normally identified from
source documents, such as sales invoice, official
receipts, delivery receipts, and the like.
Types of Events
 External events – are transactions that involve the
business and another external party.
 Internal events – are events that do not involve
an external party.

2. Journalizing - Journalizing refers to recording

an identified accountable event in the journal by
means of a journal entry.

Simple and Compound journal entries

• Simple journal entry – contains a single debit
and a single credit element.
• Compound journal entry – contains two or
more debits or credits.
3. Posting
4. Unadjusted trial balance
5. Adjusting entries
6. Adjusted trial balance (and/or Worksheet)
7. Financial statements
8. Closing entries
9. Post-closing trial balance
10. Reversing entries