FAR – Chapter 6 and 7

Accounting Cycle represents the steps or procedures used to record transactions and prepare financial
Statements. It is also implements the accounting processes of identifying, recording and communicating
economic information.

STEPS IN THE ACCOUNTING CYCLE

 Identified and analyzing – the accountant gathers information from source document and
determines the effect of the transactions on the account
 Journalizing – identified the accountable events are recorded.
 Posting – information from the journal will be transferred to the ledger.
 Preparing for Unadjusted trial balance – balances of the general ledger accounts are proved as
to equality of debit and credit. This is serves as the basis for adjusted entries. (optional)
 Preparing for adjusted entries – accounts are updated as of the reporting date on an accrual
basis by recording accruals, expiration of deferrals, estimations, and other events often not
signaled by new sources documents.
 Review of revenues and expenses
 Preparing the adjusted trial balance (worksheet preparation) - the equality of debits and
credits are rechecked after adjustments are made. It is also serves as the basis for the
preparation of financial statements. (optional)
 Preparing the financial statements - means by which information processed is communicated
to user
 Closing the books – involves journalizing and posting closing entries and ruling the ledgers.
Temporary accounts or nominal are closed and the resulting profit or loss is transferred to an
equity account.
 Preparing the post-closing trial balance – equity of debits and credit are again rechecked after
the closing process. (optional)
 Recording reversing entries – usually made at the beginning of the nest accounting period.
(optional)

Accountable events – meaning recorded on the books of accounts

-affect the assets, liability, income or expense
-it is (transaction) normally identified from source document, such as sale invoices, official receipts,
delivery receipts, and others.
Non- accountable events – meaning it is not recorded on the books of accounts
-has no effect on the accounts

Sales invoices (SI) – used for the sales of goods while official receipts, are used for the rendering of
services.
-rendered service but you didn’t pay.
Invoices - it is an official document but not formal document.

Sources of Documents:
 Purchase order - is a document issued by a buyer to a seller indicating the types, quantities
and agreed prices for products or services that the buyers intends to purchase.
 You buy from the suppliers on account (account payable)
 Delivery receipts – is a document signed by the receiver of the shipment acknowledging the
receipts of the goods.
  Proof of delivery
 Deposit slip – evidences a deposit to a bank account. It shows the date of deposit, the bank
account name and number, and the account deposited.
 Bank Statement – report issued by a bank ( on a monthly basis) it shows the deposit and
withdrawals during the period and cumulative balance of a depositor’s bank account.
 Check - is an instrument that orders a bank (drawee) to pay the person named on the check
or the bearer thereof (payee) a definite amount of money from the drawer’s bank account.
 Statement of account – is a report a business sends to its customer listing the transactions
with the customer during a period.
 Payments made by the customer and any remaining balance due from the customer.
 Serves as a notice of billing.

Types of events
External events – transactions that involves the business and another external party.
Internal events – events that do not involves an external party.

Parts of journal entry

 Dates – journal entries are recorded in the journal chronologically.
 Account title and Accounts to be debited and credited - under the double-entry
system, each transaction is recorded in the journal in two parts – debit and credit
 Short descriptions of the transaction - provided for future reference.

Format of journal entries

 Simple journal entry – one that contains a single debit and single credit element.
 Compound journal entry – one that contains two or more debits and credits.
 they only used when faithful present the transactions.

Posting - the third step in accounting cycle,

 it is the process if transferring data from the journal to the appropriate accounts in the
ledger.
 Posting is done by transferring the amount of debits and credits in a recorded journal
entry to the ledger accounts.
 The purpose of posting is to classify the effect of transactions on asset, liabilities, equity,
income and expense accounts in order to provide more meaningful information.
 Posting simply involves transferring the debit and credit amounts of a journal entry to
the affected accounts in the ledger
 Accounts in the ledger resemble a “t-account.”

Trial Balance - is a list of general ledger accounts and their balances. It is prepared to check the equality
of total debits and total credit in the ledger.

Types of Trial Balance

  Unadjusted trial balance – this is prepared before adjusting entries are made. Adjusting
entries, and consequently financial statements, cannot be prepared unless the total
debits and credits in the unadjusted trial balance are equal
 Adjusted trial balance – this is prepared after adjusting entries but before the financial
statements are prepared.
-The adjusted trial balance is the one will be reported on the financial statement.
 Posting-closing trial balance – this is prepared after the closing process.

Errors revealed by a trial balance (caused the total debit and credit)
 Journalizing or posting one-half of an entry (Not balance)
 Recording one part of an entry for a different amount than the other part (Debit 5,000
and Credit 5,500)
 Transplacement error on one side of an entry (slide error) – is committed when the
number of digits in an amount is incorrectly increased or decreased, for example, a
1,000 amount is recorded as 100 or 10,000
 Transposition error on one side of an entry – is committed when digits in an amount are
interchanged, for example, a 15,652 amount is recorded as 15.625 or 12.265.

Errors revealed by a trial balance (do not caused the total debit and credit)
 Omitting entirely the entry for a transaction
 Journalizing or potting an entry twice
 Using a wrong account with the same normal balance a the correct account
 Wrong computation with same erroneous amount posted to both the debits and credits.