AKLAN STATE UNIVERSITY

School of Management Sciences

Bachelor of Science in Accountancy
Banga, Aklan

BCFA 1: FUNDAMENTALS OF ACCOUNTING 1

Chapter 3
THE ACCOUNTING CYCLE

The accounting cycle is a set of steps or procedures that are repeated in the same order
every period. It is used to record transactions and prepare financial statements.

The accounting cycle is composed of the following steps:

1. Documentation. Analyzing business documents which serve as a basis of recording
transactions.
2. Journalizing. Recording business transactions in the journal to have chronological
records of economic activities.
3. Posting. The information in the general journal is transferred to the General Ledger
to create a record of classified accounts.
4. Preparation of Trial Balance. A trial balance is prepared to prove the equality of
debits and credits in the general ledger.
5. Adjusting entries. Making end of period adjustments before financial statements
are prepared so that the income and expense in the income statement are
reported at their correct amounts.
6. Worksheet. Work sheet is prepared to facilitate the preparation of financial
statements.
7. Financial Statement. The basic financial statements are prepared after making the
necessary adjustments.
a. Income Statement
b. Balance Sheet
c. Statement of Cash Flows
d. Statement of Changes in Equity
e. Notes to financial statement
8. Journalizing and posting closing entries. The objective of closing entry is to transfer
the revenue, expense and drawing accounts to the capital account.
9. Preparation of a Post-closing trial balance
10. Reversing journal entries (made at the start of the next period)

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 Figure 3.1. The Accounting Cycle

DOCUMENTATION
Transactions and events are the starting points in the accounting cycle. By relying on
source documents, transactions and events can be analyzed as to how they will affect
performance and financial position. Source documents identify and describe
transactions and events entering the accounting process. These original written
evidences contain information about the nature and the amounts of the transactions.
Some of the more source documents are:
✓ Sales invoice
✓ Cash register tapes
✓ Official receipts
✓ Bank deposit slips
✓ Bank statements
✓ Checks
✓ Purchase orders
✓ Time cards
✓ Statement of accounts

Transaction Analysis
The analysis of transactions should follow these four basic steps:
1. Identify the transaction from source documents
2. Indicate the accounts – assets, liabilities, equity, income or expenses – affected
by the transaction.
3. Ascertain whether each account is increased or decreased by the transaction.
4. Using the rules of debit or credit, determine whether to debit or credit the account
to record its increase or decrease.

Chart of Accounts
It is a list of Assets, Liabilities, Revenue, Expense and Capital Accounts applicable to the
business enterprise. It normally includes brief description of the nature of transaction,
identification number or account number. Presented below is the chart of accounts for
the illustration.

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 KAYAMOYAN ACCOUNTING FIRM
Chart of Accounts

Balance Sheet Accounts Income Statement Accounts

ASSETS REVENUE
110 Cash 410 Service Revenue
120 Accounts Receivable
130 Notes Receivable EXPENSES
140 Office Supplies 510 Office Supplies Expense
150 Land 520 Utilities Expense
160 Office Equipment 530 Salaries Expense
165 Accumulated Depreciation - OE 540 Telephone Expense
170 Furniture and Fixtures 550 Interest Expense
175 Accumulated Depreciation - F&F 560 Rent Expense
570 Depreciation Expense - OE
LIABILITIES 580 Depreciation Expense - F&F
210 Accounts Payable 590 Miscellaneous Expense
220 Notes Payable
230 Utilities Payable
240 Salaries Payable
250 Interest Payable
260 Unearned Revenue

EQUITY
310 Kayamoyan, Capital
320 Kayamoyan, Withdrawals
330 Income Summary

JOURNALIZING

The Journal is a chronological record of events or business transactions showing all the
effects of each transaction in terms of debits and credits. Because transactions are
initially recorded in the journal, it is called the book of original entry. The simplest journal
is general journal. It should contain the following:
✓ Date. Write the year on the first line and month on the next line of the first
transaction unless there is a change in month for the succeeding transaction or a
new page is used.
✓ Account Titles and Explanation. The debit account will be the first entry under this
column. The credit account is written on the next line indented half-inch. The
explanation is written below the credit. One line must be skipped before the next
transaction.
✓ P.R. (Posting Reference). Once the entry is posted to ledger, the corresponding
account code will be posted under this column. While, it should be left blank until
the posting has been done.
✓ Debit. The debit amount of each debit account should be written under this
column.
✓ Credit. The credit amount of each credit account should be written under this
column.

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Types of Journal
1. General journal – is intended for transactions which are not included in the special
journals
2. Special Journals are intended for recurring business transactions.
a. Cash receipts – are used for recording of cash receipts or collections
b. Cash disbursements – are used for recording of cash disbursements or cash
payments
c. Sales Journal – are used for recording of sales on accounts
d. Purchases Journal– are used for recording of purchases on account
e. Others

Figure 1 – Proforma: General Journal (Adjusting Entry) Page No.

Date Account Titles and Debit Credit
Explanation
2020
Dec 31 Rent Expense 1 0 0 0 0 00
Prepaid Rent 1 0 0 0 0 00
Office rental for Nov. & Dec.
2020.

Figure 2 – Proforma: General Journal (Initial Investment) Page No.

Date Account Titles and Debit Credit
Explanation
2020
Jan 01 Cash 5 0 0 0 0 00
G, Capital 5 0 0 0 0 00
Initial Investment

Figure 3 - Proforma: Cash Receipts Journal

Post Cash Sales Accounts Receivable
Date Account Credited Ref Debit Credit Credit
Dec 3 3R Company / 1 2 0 0 0 00 1 2 0 0 0 00

5 2T Trading / 2 8 0 0 0 00 2 8 0 0 0 00

8 MM Company / 3 5 0 0 0 00 3 5 0 0 0 00

Figure 4 - Proforma: Cash Disbursement Journal

Check Post Cash Purchases Accounts Payable
Date No. Payee Ref Credit Debit Debit
Dec 2 1001 RC Mktg. / 1 0 0 0 0 00 1 0 0 0 0 00

4 1002 Royal Supermart / 2 5 0 0 0 00 2 5 0 0 0 00

9 1003 XYZ Company / 1 0 0 0 0 00 1 0 0 0 0 00

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Figure 5 - Proforma: Sales Journal
Inv. Post Accounts Receivable Sales
Date No. Account Credited Ref Debit Credit
Dec 2 101 3R Company / 1 0 0 0 0 00 1 0 0 0 0 00

3 102 2T Trading / 2 5 0 0 0 00 2 5 0 0 0 00

6 102 MM Company / 5 0 0 0 0 00 5 0 0 0 0 00

Figure 6 - Proforma: Purchases Journal

Post Credit Accounts Payable Purchases
Date Account Credited Ref Terms Credit Debit
Dec 1 ABC Company / n/30 1 0 0 0 0 00 1 0 0 0 0 00

5 XYZ Company / n/30 2 5 0 0 0 00 2 5 0 0 0 00

7 EFG Company / n/30 5 0 0 0 0 00 5 0 0 0 0 00

Journalizing is the recording of increases and decreases in the assets, liabilities and equity
in the journal. Transactions may require addition to both sides (left or sides), subtractions
from both sides (left and right sides), or an addition and subtraction on the same side (left
or right sides). But in all cases the equality must be maintained.

Accounting is based on a double-entry system which means that the dual effects of
business are recorded. A debit side entry must have a corresponding credit side entry.
For every transaction, there must be one or more accounts debited and one or more
accounts credited and must be equal both sides. Each transaction affects at least two
accounts.

The rules of debit and credit in accounts:

Account Debit Credit

Assets + -
Liabilities - +
Equity - +
Income - +
Expenses + -
increase (+) decrease (-)

The Simple and Compound Entry

A Simple Entry is when only two accounts are affected where there is one debit account
and one credit account. If a transaction would require the use of three or more accounts
in some cases, the entry is called a Compound Entry.

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Illustrative Example

Using a general journal, record the following transactions:

On January 1, 2020, Mr. Reyes invests P35,000 cash to the business.

Date Account Titles and Debit Credit
Explanation
2020
Jan 01 Cash 3 5 0 0 0 00
Reyes, Capital 3 5 0 0 0 00
Initial Investment

Analysis:
Asset increased in form of Cash. Owner’s Equity increased in form of Capital. Increase in
assets is recorded by a debit to Cash and increase in owner’s equity is recorded by a
credit to Reyes, Capital.

January 2 Purchase office supplies worth P5,000 for cash.

Date Account Titles and Debit Credit
Explanation
2020
Jan 02 Office Supplies 5 0 0 0 00
Cash 5 0 0 0 00
Purchased office supplies
for cash

Analysis:
Asset increased in form of Office Supplies. Another asset decreased in form of Cash.
Increase in assets is recorded by a debit to Office Supplies and decrease in another asset
is recorded by a credit to Cash.

January 5 Paid in advance office rental for two months amounting to P10,000.
Date Account Titles and Debit Credit
Explanation
2020
Jan 05 Prepaid Rent 1 0 0 0 0 00
Cash 1 0 0 0 0 00
Paid in advance two
months office rental.

Analysis:
Asset increased in form of Prepaid Rent. Another asset decreased in form of Cash.
Increase in assets is recorded by a debit to Prepaid Rent and decrease in another asset
is recorded by a credit to Cash.

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January 17 Billed customers for services rendered, P50,000.
Date Account Titles and Debit Credit
Explanation
2020
Jan 17 Accounts Receivable 5 0 0 0 0 00
Service Income 5 0 0 0 0 00
Services rendered on
account

Analysis:
Asset increased in form of Accounts Receivable. Owner’s equity increased in form of
Service Income. Increase in assets is recorded by a debit to Accounts Receivable and
increase in Owner’s equity is recorded by a credit to Service Income.

January 31 Paid employee salaries of P20,000.

Date Account Titles and Debit Credit
Explanation
2020
Jan 31 Salaries Expense 2 0 0 0 0 00
Cash 2 0 0 0 0 00
Payment of Salaries for
the month of January
2020.

Analysis:
Owner’s equity decreased in form of Salaries Expense. Asset decreased in form of Cash.
Decrease in Owner’s equity is recorded by a debit to Salaries Expense and decrease in
Assets is recorded by a credit to Cash.

January 31 Paid electricity bill for the month, P2,000.

Date Account Titles and Debit Credit
Explanation
2020
Jan 31 Utilities Expense 2 0 0 0 00
Cash 2 0 0 0 00
Payment of electricity for
the month of January 2020.

Analysis:
Owner’s equity decreased in form of Utilities Expense. Asset decreased in form of Cash.
Decrease in Owner’s equity is recorded by a debit to Utilities Expense and decrease in
Assets is recorded by a credit to Cash.

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February 8 Issued promissory note to a lending company for P100,000 loaned amount.
Date Account Titles and Debit Credit
Explanation
2020
Feb 08 Cash 5 0 0 0 0 00
Notes Payable 5 0 0 0 0 00
Borrowed money from a
lending company

Analysis:
Asset increased in form of Cash. Liability increased in form of Notes Payable. Increase in
assets is recorded by a debit to Cash and increase in Liabilities is recorded by a credit to
Notes Payable.

February 11 Collected cash for 25,000 from credit customers.

Date Account Titles and Debit Credit
Explanation
2020
Feb 11 Cash 5 0 0 0 0 00
Accounts Receivable 5 0 0 0 0 00
Partial collection from a
credit customer

Analysis:
Asset increased in form of Cash. Another asset decreased in form of Account Receivable.
Increase in assets is recorded by a debit to Cash and decrease in another asset is
recorded by a credit to Accounts Receivable.

February 21 Acquired Office Equipment on account worth 60,000.

Date Account Titles and Debit Credit
Explanation
2020
Feb 21 Office Equipment 6 0 0 0 0 00
Accounts Payable 6 0 0 0 0 00
Bought office equipment
on account.

Analysis:
Asset increased in form of Office Equipment. Liability increased in form of Accounts
Payable. Increase in assets is recorded by a debit to Office Equipment and increase in
Liabilities is recorded by a credit to Accounts Payable.

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February 23 Paid the lending company 10,000.
Date Account Titles and Debit Credit
Explanation
2020
Feb 23 Notes Payable 1 0 0 0 0 00
Cash 1 0 0 0 0 00
Made partial payment of
loan

Analysis:
Liability decreased in form of Notes Payable. Assets decreased in form of Cash. Decrease
in Liabilities is recorded by a debit to Notes Payable and decrease in assets is recorded
by a credit to Cash.

February 25 Made a partial payment for office equipment, 25,000.

Date Account Titles and Debit Credit
Explanation
2020
Feb 25 Accounts Payable 1 0 0 0 0 00
Cash 1 0 0 0 0 00
Made partial payment of
office equipment.

Analysis:
Liability decreased in form of Accounts Payable. Asset decreased in form of Cash.
Decrease in Liabilities is recorded by a debit to Accounts Payable and decrease in assets
is recorded by a credit to Cash.

February 27 Withdrew cash of 15,000 from the business.

Date Account Titles and Debit Credit
Explanation
2020
Feb 27 Reyes, Drawing 1 5 0 0 0 00
Cash 1 5 0 0 0 00
Reyes withdrew cash for
personal use

Analysis:
Owner’s equity decreased in form of Reyes, Drawing. Asset decreased in form of Cash.
Decrease in Owner’s equity is recorded by a debit to Reyes, Drawing and decrease in
assets is recorded by a credit to Cash.

POSTING
A grouping of the entity’s accounts is referred to as a ledger. Although some firms may
use various ledger to accumulate certain detailed information, all firms have a general

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ledger. A general ledger is the reference book of the accounting system and is used to
classify and summarize transactions, and to prepare data for basic financial statements.

The ledger is also called the Book of Final Entry.

The accounts in the general ledger are classified into two general groups:
✓ Permanent/Real accounts –balance sheet accounts
✓ Temporary/Nominal accounts –income statement accounts

Posting means transferring the amounts from the journal to the appropriate accounts in
the ledger. Every item/account in the Balance Sheet and in the Income Statement has
a ledger account. The debit entries in the journal are posted on the debit side of the
particular account in the ledger. Likewise, the credit entries in the journal are posted on
the credit side of the particular account in the ledger.

The Account (T-Account)

The account may be defined as a detailed record of the increases, decrease and
balance of each element that appears in an entity’s financial statements. The simplest
form of the account is known as the “T” account because of its similarity to the letter T.
the account has three parts as shown on the next page.

Account Title
Debit Credit
1. Increase in Asset 1. Decrease in Asset
2. Decrease in Liability 2. Increase in Liability
3. Decrease in Owner’s Equity 3. Increase in Owner’s Equity
(Withdrawals and Expenses) (Investment, Additional
Investment, Revenue/Income)

Illustrative Examples (Using the example in journalizing above.)

To post transactions from general journal to general ledger.

General Journal
Date Account Titles and Debit Credit
Explanation
2020
Jan 01 Cash 3 5 0 0 0 00
Reyes, Capital 3 5 0 0 0 00
Initial Investment

General Ledger

Cash Reyes, Capital

Date Dr. Cr. Dr. Cr. Date
Jan 35,000 35,000 Jan 1
1

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General Journal
Date Account Titles and Debit Credit
Explanation
2020
Jan 02 Office Supplies 5 0 0 0 00
Cash 5 0 0 0 00
Purchased office supplies
for cash

General Ledger
Office Supplies Cash
Date Dr. Cr. Dr. Cr. Date
Jan 5,000 Jan 1 35,000 5,000 Jan 2
2

General Journal
Date Account Titles and Debit Credit
Explanation
2020
Jan 05 Prepaid Rent 1 0 0 0 0 00
Cash 1 0 0 0 0 00
Paid in advance two
months office rental.

General Ledger
Prepaid Rent Cash
Date Dr. Cr. Dr. Cr. Date
Jan 10,000 Jan 1 35,000 5,000 Jan 2
5
10,000 Jan 5

*The ending balance of an account is the difference between the total debits and total
credits. It is reflected on the side with higher amount. Thus, the ending balance of Cash
is 20,000 which is reflected on the debit side.
Cash
Dr. Cr. Date
Jan 1 35,000 5,000 Jan 2
10,000 Jan 5
End. Bal 20,000

Examples of general ledger accounts that are supported by a subsidiary ledgers:

- Receivables
- Payables
- Inventories
- Fixed assets
- Investments

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Proforma: Accounts Receivable Subsidiary Ledger
YZE Company
Date PR Debit Credit Balance
Dec 1 SJ 1 5 0 0 0 00 5 0 0 0 00
8 CRJ 1 2 0 0 0 00 3 0 0 0 00

Proforma: Accounts Payable Subsidiary Ledger

LEY Company
Date PR Debit Credit Balance
Dec 2 PJ 1 7 0 0 0 00 7 0 0 0 00
10 CDJ 3 0 0 0 00 4 0 0 0 00
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TRIAL BALANCE
- The trial balance is a list of accounts and the ending account balances in the
general ledger.
- The heading composes of Name of the Business, Title of the Report and Date
of the Report.
- The Account titles are arranged in the unadjusted trial balance: Assets,
Liabilities; Equity; Income; and expenses

Proforma: Unadjusted Trial Balance

KAYAMOYAN Accounting Firm
Unadjusted Trial Balance
December 31, 2019
Account Title Debit Credit
Cash P 35,000.00
Accounts Receivable 10,000.00
Office Supplies 5,000.00
Office Equipment 15,000.00
Accounts Payable P 7,500.00
Notes Payable 12,500.00
Utilities Payable 5,000.00
Yze, Capital 50,000.00
Yze, Drawing 8,000.00
Service Income 15,000.00
Salaries Expense 14,000.00
Utilities Expense 3,000.00 ___________
P 90,000.00 P 90,000.00

Errors revealed by a trial balance

If the total debits is not equal to the total credits in the trial balance, it reveals errors.

Examples:
1. Recording and posting of debit without a corresponding credit or vice versa.

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2. Journalizing an amount in debit side which differs from the amount in the credit side.
3. Transposition Errors
4. Transplacement Errors

Transposition error occurred when there is an omission or addition in the number of digits
of the amount (e.g. P100 recorded as P1,000 or P100,000 is recorded as P10,000).

Transplacement error occurred when digits in an amount are interchanged (e.g. P10,769
is recorded as P10,796).

PREPARATION OF THE FINANCIAL STATEMENTS

All accounting reports require a heading which is written on the first three lines at the
center of the report being prepared.
1st line – name of the Company
2nd line – title of the report or statement
3rd line – Date of the report

For income statement and Statement of Changes in Equity, the date is written as:
For the month ended ______________;
For the year ended ______________; or
For the six months ended ______________

For the balance sheet, the date is written as: As of ___________ or just the date itself.

EXAMPLES

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-End of Module 3-

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