ACCOUNTING CYCLE

Accounting
- Service Activity
- Function to provide information, primarily financial in nature, about economic events that
is intended to be useful in making economic decisions.

Users of Financial Information

● Investors (existing and potential investors)
● Lenders and other creditors
● Employees
● Customers
● Governments and their agencies
● Public

Accounting Cycle
- Series of sequential steps or procedures to accomplish the accounting process.
Repeated each accounting period.
Steps
1. Identification of Events to be Recorded
2. Transactions are Recorded in the Journal
3. Journal Entries are Posted to the Ledger
4. Preparations of Trial Balance
5. Preparation of the Worksheet including the Adjusting entries
6. Preparation of Financial Statements
7. Adjusting Journal Entries are Journalized and Posted
8. Closing Journal Entries are Journalized and Posted
9. Preparation of Post-Closing Trial Balance
10. Reversing Journal Entries are Journalized and Posted

● The first 3 steps in the accounting period are accomplished during the period.
● 4th - 9th steps generally occur at the end of the period.
● The last step occurs at the beginning of the next period.

MAY LEGEND

MON TUES WED THURS FRI SAT SUN

1 2 3 4 5 6 7 STEPS 1 - 3

8 9 10 11 12 13 14 STEPS 4 -9

15 16 17 18 19 20 21 STEP 10

22 23 24 25 26 27 28
29 30 31
JUNE

From Filipino Accounting Tutorial (YT)

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Step 1: IDENTIFICATIONS OF EVENTS TO BE RECORDED

Aim: to gather informations about transactions or events generally through the ​source
documents

Source Documents
- Transactions and events are the starting points in the accounting cycle.
- By relying on source documents, transactions and events can be analyzed as how they
will affect performance and financial position
- SOURCE DOCUMENTS ARE BASES FOR THE JOURNAL ENTRIES
- These original ​written evidences​ contain information about the nature and the amounts
of the transactions.
- Transactions must be supported by a source documents or evidence

Common source documents:

● Official receipts - evidencing the receipt of payments for services/goods delivered
● Bank deposits slips - paper form supplied by the back to a customer/depositor when
depositing funds to the bank
● Checks - contains unconditional order from the payor that directs a bank to pay a definite
sum of money to the payee.
● Sales invoices - request of payment to the customer for goods sold/ services provided by
the seller
● Delivery receipts - document signed by the receiver of a shipment to indicate that they
have received the item being shipped and have taken possession of it.
● Completing reports - proof that project/ activity was completed
● Statements of accounts - detailed report of the content of account. Shows billings to and
payments from the customer during a specific time period resulting in an ending balance.

Step 2: TRANSACTIONS ARE RECORDED IN THE JOURNAL

Aim: to record the economic impact of transactions on the firm in a journal, which is a form that
facilitates transfer to the accounts.

Journal​ - a chronological record of the entity’s transactions.

Journal entry​ - shows all the effects of a business transactions in terms of debits and credits.
Journalizing​ - process of recording transactions

Standard contents of the general journal:

1. Date - year and month are not rewritten, unless new page.
2. Account Titles and Explanations (Particulars) - Dr: extreme left, Cr: slightly indented on
next line, Explanation: indented away from credit on the next line
3. P.R. (Posting Reference) - used when entries are posted to the related ledger accounts.

From Filipino Accounting Tutorial (YT)

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 4. Debit
5. Credit

REMEMBER: ​DEALER

DEBIT CREDIT

D​RAWINGS L​IABILITIES

E​XPENSES E​QUITY

A​SSETS R​EVENUES/INCOME

Step 3: JOURNAL ENTRIES ARE POSTED TO THE LEDGER

Posting​ - transferring the amount from journal to the appropriate accounts in the ledger.
Ledger​ - grouping of the entity’s accounts
General ledger​ - “reference book” and used to summarize transactions, and prepare data for
basic financial statements.

General Ledger are classified into 2 general ledger groups:

A. Balance Sheet​ - permanent accounts ( assets, liabilities, and equity)
B. Income statement​ - temporary accounts (income and expenses)

Steps in posting journal entries to the ledger (from journal to ledger):

1. Transfer the date of transaction.
2. Transfer page number of journal to journal reference column of the ledger (PR).
3. Post debit/credit figure of journal to debit/credit figure of ledger.
4. Enter the account number of ledger to the journal PR after being posted to the ledger.

Step 4: PREPARATION OF TRIAL BALANCE

Trial balance
- List of all accounts with their respective debits or credits balance.
- Made to verify equality of debits and credits.
- Helps minimize accounting errors.
- Equal means balance.
- Balance is a proof of accuracy, but does not signify the absence of errors.

Procedures in preparing a trial balance:

From Filipino Accounting Tutorial (YT)

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 1. List the account titles in order : assets, liability, equity, income, expense (if account code
is given, use it in their code order) .
2. Obtain the account balance of each account from the ledger, enter debit to debit column
and credit to credit column.
3. Total debit and credit column separately
4. Compare the totals of debit and credit if equal

Step 5: PREPARATION OF ADJUSTING ENTRIES

PREPARING THE WORKSHEET

Steps in preparing the worksheet:

1. Enter the account balances in unadjusted trial balance columns and total the amounts
2. Enter the adjusting entries in the adjustment columns and total the amounts
3. Compute each account’s adjusted balance by combining unadjusted trial balance and
adjusted figures. Enter the adjusted amounts in the adjusted trial balance columns
4. Extend the asset, liability, and owner’s equity amounts from the adjusted trial balance to
the balance sheet columns. Extend the income and expense amount to the income
statements columns. Total the statement columns.

Step 6. PREPARING THE FINANCIAL STATEMENTS

Complete set of financial statements comprises:

1. Statement of financial position (balance sheet)
2. Statement of comprehensive income
3. Statement of changes in equity
4. statement of cash flows
5. Notes - summary of significant accounting policies and explanatory information
6. Statement of financial position at the beginning of the earliest comparative period for
application of accounting policies, retrospective restatement, and reclassifies items.

STATEMENT OF COMPREHENSIVE INCOME

An entity shall present all items of income and expense in a period:
a. In a ​single​ statement of comprehensive income
b. In ​two​ statements: a statements displaying components of profit and loss (separate
income statement) and a second statement beginning with profit and loss and displaying
components of other comprehensive income (statement of comprehensive income)

Income statemen​t - statement showing the performance of the enterprise in a given period of
time. It summarizes the revenues earned and expenses incurred for that period.
- Para malaman kung tumutubo ba ang entity or nalulugi ito

Single statement

From Filipino Accounting Tutorial (YT)

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Revenues xx,xxx
Less: Expenses (xx,xxx)
Profit/Loss xx,xxx
Add: Other comprehensive Income xx,xxx

Total comprehensive income xx,xxx

Two Statements (part 1)

Revenues (Itemized) xx,xxx

Expenses (Itemized) (xx,xxx)

Profit(loss) xx,xxx

Statement of Other Comprehensive Income

Profit/Loss xx,xxx

Other Comprehensive Income xx,xxx

Total COmprehensive Income xx,xxx

STATEMENT OF CHANGES IN EQUITY

- Summarizes the changes that occurred in owner’s equity
- Increases comes from additional investments and profit of entity
- Decreases comes from withdrawal and profit loss

STATEMENT OF FINANCIAL POSITION

- Shows the financial position/condition of an entity
- Information needed are the net balance at the end of the period
- Also known as the balance sheet
- Can be presented as report format or account format
- REPORT FORMAT
- Lists the assets, liabilities, and equity in a vertical sequence
- ACCOUNT FORMAT
- Lists the assets on the left and liabilities and owner’s equity on the right

REPORT FORMAT

ASSETS

From Filipino Accounting Tutorial (YT)

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 Current Assets (Itemized) XX,XXX

Non-Current Assets (Itemized) XX,XXX

Total Assets XX,XXX

LIABILITIES AND OWNER’S EQUITY

Current Liabilities (itemized) XX,XXX

Non-Current Liabilities (itemized) XX.XXX

Total Liabilities XX,XXX

Owner’s Equity XX,XXX

Total Liabilities and Owner's Equity XX,XXX

ACCOUNT FORMAT

ASSETS LIABILITIES AND OWNER’S EQUITY

Current Assets xx,xxx Current Liabilities xx,xxx

Non-Current ASsets xx,xxx Non-Current LIabilities xx,xxx

Total Liabilities xx,xxx

Owner’s Equity xx,xxx

Total Assets xx,xxx Total Liabilities & Owner’s xx,xxx

Equity

STATEMENT OF CASH FLOWS

- Provide information about the cash receipts and cash payments of an antity during the
period.
- Formal statements that classifies cash receipts (inflows) and cash payments (outflows)
into operating, investing, and financing activities.
- Operating Activities are usually from operating activities of an entity
- Investing activities are usually from investments, property, and equipment of an entity
- Financing activities are usually from the investments of owners of an entity and issuance
of notes/accounts payable

CASH FLOWS FROM OPERATING ACTIVITIES

- Receipts from Sales of goods and performance of service
- Receipts from Royalties, fees, commissions and other revenues
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 - Payments to suppliers of goods and services, employees, taxes, interest and
other operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

- Receipts from sale of property and equipment
- Receipts from sale of investments in debt or equity securities
- Payments to acquire property and equipment
- Payments to acquire debt or equity securities
- Payments to make loans and other generally in the form of N/R (Notes
Receivables)
- Receipts from collection of loans to others generally in the form of N/R

CASH FLOWS FROM FINANCING ACTIVITIES

- Receipts from investment by owners
- Receipts from issuance of notes payable
- Payments to owners in the forms of withdrawals
- Payments to settle notes payable

Step 7: ADJUSTING JOURNAL ENTRIES ARE JOURNALIZED AND POSTED

- Brings the ledger into agreement with the data reported in the financial statements
Lipat mo yung mga na-adjust na accounts para mag equal sila

STEPS IN PREPARING CLOSING ENTRIES

1. Close the following accounts to the income “summary”
a. Income
b. Expense
2. Close “Income Summary” to “Capital account”
3. Close “withdrawals” to the “Capital accounts”

Step 8: CLOSING JOURNAL ENTRIES ARE JOURNALIZED AND POSTED

- A temporary account is said to be closed when an entry is made such that its balance
becomes zero. Closing simply transfers the balance of one account to another account.
- Balances of temporary accounts are transferred to the capital accounts
- Temporary accounts - income, expenses, and withdrawal accounts
- Income statement should be equal with the income summary
- Debit should be bigger than credits
- Pag income summary’s balancing figure is debit ibig sabihin ay profit loss
- Pag income summary’s balancing figure is cebit ibig sabihin ay profit

From Filipino Accounting Tutorial (YT)

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To close Income Accounts
- Debit all the revenue accounts
- Credit income summary account

To close expense accounts

- Debit income summary account
- Credit all the expense accounts

To close income summary to capital

- Debit income summary
- Credit capital
- Income summary adds up to the profit(loss) of the capital

To coles withdrawals to the capital account

- Debit capital
- Credit withdrawals

Purpose of closing entries

- Temporary accounts measured periodically
- Avoids paghahalo ng accounts monthly

Step 9: PREPARATION OF POST-CLOSING TRIAL BALANCE

- It is possible to commit error in posting adjusting and closing entries to the ledger
accounts
- Prepare new trial balance, a final trial balance
- Final trial balance is called post-closing trial balance

Procedures in preparing trial balance

1. List the account titles in numerical order
2. Obtain the account balance from the ledger
3. Add the debit and credit columns
4. Compare totals of columns

Step 10: REVERSING JOURNAL ENTRIES ARE JOURNALIZED AND POSTED

Reversing Entry
- exact opposite of a related adjusting entry made at the end of the period
- A​ bookkeeping technique​ to simplify the recording of regular transactions in the next
accounting period

From Filipino Accounting Tutorial (YT)

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 - Reversing entries are​ OPTIONAL
- It should be made for any adjusting entry that​ increases an asset or a liability account

Adjusting entries subject to reversing entries are

1. Prepaid expense (expense method)
2. Deferred Income (income method)
3. Accrued expense
4. Accrued income

Adjusting Entries

EXPENSE METHOD ASSET METHOD

DEFERRALS

Prepaid Expense Prepaid Expense Expense

Expense Prepaid Expense

INCOME METHOD LIABILITY METHOD

Deferred Income (unearned) Income Deferred Income

Deferred Income Income

Depreciation Depreciation Expense

Accumulated Depre.

ACCRUALS

Accrued Income Receivable

Income

Accrued Expense Expense

Payable

Accrual of Bad Debts Doubtful Account exp.

Allowance for Bad Debt Accs

From Filipino Accounting Tutorial (YT)

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 MERCHANDISING BUSINESS: COMPLETING THE
ACCOUNTING CYCLE
ADJUSTING ENTRIES

WORKSHEET

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