Anda di halaman 1dari 67

RECORDING, CLASSIFYING,

AND SUMMARIZING
FINANCIAL TRANSACTIONS:
The Accounting Cycle
THE ACCOUNTING PROCESS
• ACCOUNTING PROCESS – comprises the activities of recording, classifying,
and communicating economic information that is useful for decision making
purposes.
• RECORDING – it involves putting into records the business transactions and
events.
• CLASSIFYING – this involves the grouping of similar items together in order
to make the recording of the different transactions and events more
systematically.
• COMMUNICATING – involves the process of summarizing and interpreting
reports presented to the interested users
• Summarizing – this involves the preparation of financial statements.
• Interpreting – this involves the analysis of financial statements for the
benefit of the readers or users.
THE ACCOUNTING PROCESS
• End Goal of the process: to create financial statements that are useful to
external parties in evaluating the performance of the business.
• Aspects of the Process:
• Accounting Information System
• Financial Statements
ACCOUNTING INFORMATION SYSTEM
• ACCOUNTING INFORMATION SYSTEM (AIS) – a system of collecting and
processing transaction data and disseminating financial information to
interested parties.
• Components of the AIS:
• Personnel directly involved in accounting work.
• Accounting Policies and Standards
• Procedures
• Equipment and devices
• Records and reports
ACCOUNTING CYCLE
• ACCOUNTING CYCLE – represents the steps or accounting procedures
normally used by entities to record transactions and prepare financial
statements.
• Steps in the Cycle:
1. Identifying and Analyzing Transactions
2. Journalizing
3. Posting
4. Preparing the Unadjusted Trial Balance
5. Preparing the Adjustments (Journalizing and Posting)
6. Preparing the Adjusted Trial Balance
7. Preparing the Financial Statements
8. Closing the Books (Journalizing and Posting)
9. Preparing the Closing Trial Balance
10. Preparing the Reversing Entries (Journalizing and Posting)
ACCOUNT
• ACCOUNT – is a record of one or more transactions relating to a particular
item. It is the most basic summary device in accounting where increases,
decreases and balance of each element that appears in an entity’s
financial statements are detailed.
• T-ACCOUNT – the simplest form of an account. It was called by its name
because of its form which resembles the letter “T”.
• Parts of the T-Account:
THE ACCOUNTING EQUATION
• ACCOUNTING EQUATION – the most basic tool of accounting which
expresses the relationship of the resources controlled by the enterprise, the
present obligations of the enterprise and the residual interest in the assets. It is
expressed in an equation to show the “equality” between assets and the
“sources” of asset.
• The Basic Equation:
Asset = Liabilities + Equity

• Expanded Equation:
Asset = Liabilities + Equity – Drawings + Revenues - Expenses
THE SYSTEMS OF RECORDING
• SINGLE ENTRY SYSTEM – a method of recording which uses a simple narrative,
where transactions are not analyzed in terms of debits and credits.
• DOUBLE-ENTRY SYSTEM – a method of recording the business transactions in
terms of the “dual effect” on the accounting elements. Under this system, a
debit side entry must have a corresponding credit side entry. Thus, for every
transaction, at least one account is debited and at least one account is
credited.
STEP 1: TRANSACTION ANALYSIS
• TRANSACTION ANALYSIS – the process of selecting a transaction or event
and analyzing its impact on the financial position.
• STEPS IN THE ANALYSIS:
1. Identify the transaction from source documents.
2. Indicate the accounts affected by the transaction.
3. Ascertain whether each account is increased or decreased by the
transaction.
4. Using the rules of debit and credit, determine whether to debit or credit
the account to record its increase or decrease.
STEP 1: TRANSACTION ANALYSIS
• TRANSACTION – a particular kind of event that involves the transfer of
something of value between two entities.
• Source Document – the basis for which a transaction is being identified.
• Types of Transaction:
1. Source of Assets (SA) – a transaction where assets are acquired through
the use of a certain claim against the company.
2. Exchange of Assets (EA) – a transaction where assets are acquired
through the use of another asset.
3. Use of Assets (UA) – a transaction where assets are sacrificed in order to
satisfy certain claims.
4. Exchange of Claims (EC) – a transaction where claims are satisfied
through the use of another claim.
STEP 1: TRANSACTION ANALYSIS
• Effects of Transactions:
Source of Assets (SA)
a. Assets (+) = Liabilities (+)
b. Assets (+) = Equity (+)
c. Assets (+) = Revenue (+)
d. Assets (+) = Expense (-)
STEP 1: TRANSACTION ANALYSIS
• Effects of Transactions:
Exchange of Assets (EA)
a. Asset (+) = Asset (-)
STEP 1: TRANSACTION ANALYSIS
• Effects of Transactions:
Use of Assets (UA)
a. Assets (-) = Liabilities (-)
b. Assets (-) = Equity (-)
c. Assets (-) = Expense (+)
STEP 1: TRANSACTION ANALYSIS
• Effects of Transactions:
Exchange of Claims (EC)
a. Liabilities (+) = Liabilities (-)
b. Liabilities (+) = Equity (-)
c. Liabilities (+) = Expenses (+)
d. Liabilities (-) = Equity (+)
e. Liabilities (-) = Revenue (+)
f. Liabilities (-) = Expenses (-)
g. Equity (+) = Equity (-)
STEP 1: TRANSACTION ANALYSIS
• Rules of Debit and Credit - Recording a transaction in its debit or credit side is
based on whether an account must be increased or decreased in a
transaction. The side on which to enter an increase in the account depends
on its account type and its place on the accounting equation.
STEP 1: TRANSACTION ANALYSIS
• EXAMPLE

TRANSACTION ASSET LIABILITIES EQUITY


The owner
invests cash in
the business
STEP 1: TRANSACTION ANALYSIS
• EXAMPLE

TRANSACTION ASSET LIABILITIES EQUITY


The owner
invests cash in INCREASE
the business
STEP 1: TRANSACTION ANALYSIS
• EXAMPLE

TRANSACTION ASSET LIABILITIES EQUITY


The owner
invests cash in INCREASE INCREASE
the business
STEP 2: JOURNALIZING
• JOURNALIZING – the process of recording a transaction into the accounting
books of an enterprise.
• JOURNAL - a chronological record of the entity’s transactions. Also called the
book of original entry.
• TYPES OF JOURNAL:
• General Journal – the simplest type of journal. A type of journal used for
general recording of the entity’s business transactions.
GENERAL JOURNAL
Date Particulars Ref. Debit (Dr.) Credit (Cr.)
STEP 2: JOURNALIZING
• TYPES OF JOURNAL:
• Special Journals – a type of journal designed for recording specific types
of transactions of a similar nature.
• Sales Journal – a special journal used to record sale on account.
SALES JOURNAL
Accounts Receivable
Invoice Ref
Date Customer name (Dr.)
No. .
Sales (Cr.)
STEP 2: JOURNALIZING
• TYPES OF JOURNAL:
• Purchase Journal – journal used to record all purchases on account.

PURCHASE JOURNAL
Purchases (Dr.)
Accounts Payable
Date Supplier's Name Ref. (Cr.)
STEP 2: JOURNALIZING
• TYPES OF JOURNAL:
• Cash Receipts Journal – a special journal used to record all types of
cash receipts.
CASH RECEIPTS JOURNAL

Sales Accounts Other


Received Cash Sales
Date OR No. Ref. Discount Receivable Accounts
From Dr. Cr.
Dr. Cr. Cr.
STEP 2: JOURNALIZING
• TYPES OF JOURNAL:
• Cash Disbursements Journal – a special journal used to record all types
of cash payments.
CASH DISBURSEMENTS JOURNAL

Check Accounts Other Purchases


Purchases Cash
Date Voucher Paid to Ref. Payable Accounts Discount
Dr. Cr
No. (Dr.) Cr. Dr. Cr.
STEP 2: JOURNALIZING
• JOURNAL ENTRIES – entries in the entity’s journal showing the effect of a
business transaction in terms of debits and credits.
• Parts of a Complete Journal Entry:
1. Date
2. Account Title and Explanation
3. Posting Reference (P.R.)
4. Debit
5. Credit
GENERAL JOURNAL
Date Particulars Ref. Debit (Dr.) Credit (Cr.)
May 12 Cash 101 50,000
Bersamin, Capital 301 50,000
To record investment
STEP 2: JOURNALIZING
• Types of Journal Entries:
• Simple Journal Entry - a type of journal entry that affects only two
accounts: one account is debited and another one is credited.

GENERAL JOURNAL
Date Particulars Ref. Debit (Dr.) Credit (Cr.)
May 12 Cash 101 50,000
Bersamin, Capital 301 50,000
To record investment
made by the owner.
STEP 2: JOURNALIZING
• Types of Journal Entries:
• Compound Journal Entry - a type of journal entry that affects more than
two accounts: one or more accounts are debited and one or more
accounts are credited.
GENERAL JOURNAL
Date Particulars Ref. Debit (Dr.) Credit (Cr.)
May 12 Cash 101 50,000
Building 151 150,000
Bersamin, Capital 301 2000,000
To record investments
made by the owner.
STEP 2: JOURNALIZING
• Types of Journal Entries:
• Adjusting Entries – entries made prior to the preparation of financial
statements to update certain accounts so that they reflect correct
balances as at the designated time. (Step 5)
GENERAL JOURNAL
Date Particulars Ref. Debit (Dr.) Credit (Cr.)
Dec 31 Interest Expense 571 25,000
Interest Payable 251 25,000
To record accrued
interest for the year.
STEP 2: JOURNALIZING
• Types of Journal Entries:
• Closing Entries – entries made at the end of the accounting period after
all adjustments have been made to zero-out the balances of all nominal
accounts (and related Contra and Adjunct Accounts) and to update the
retained earnings account. (Step 8)
• Nominal Accounts – accounts which are closed at the end of the
accounting period, which includes all income statement accounts,
Income Summary account, and, for sole proprietorship and
partnership businesses, drawing accounts.
• Real Accounts - accounts which are carried over to the next
accounting periods, which includes accounts reported under the
statement of financial position.
• Contra Accounts - accounts which offset the value of related
accounts.
• Adjunct Accounts – accounts which are added to the value of the
related account
STEP 2: JOURNALIZING
• Types of Journal Entries:
• Reversing Entries – entries made in the next accounting period to reverse
certain adjusting entries to facilitate recording of cash receipts and cash
disbursements in the next accounting period. (Step 10)
GENERAL JOURNAL
Date Particulars Ref. Debit (Dr.) Credit (Cr.)
Jan 01 Interest Payable 251 25,000
Interest Expense 571 25,000
To reverse accrued
interest recorded
last year.
STEP 2: JOURNALIZING
• Types of Journal Entries:
• Correcting Entries – entries made to correct accounting errors committed.
• Reclassification Entries – entries made to transfer an item from one
account to another account that better describes the nature of the item
transferred.
GENERAL JOURNAL
Date Particulars Ref. Debit (Dr.) Credit (Cr.)
Sept 30 Notes Receivable 112 250,000
Accounts Receivable 110 250,000
To record issuance of
promissory note by
a customer on
account.
STEP 2: JOURNALIZING
• Sample Items
• On Nov. 5, the business paid P20,000 for the purchase of land as a future
building site.
• On Nov. 10, the business purchased supplies on account (or on credit) for
P1,350.
• On Nov. 18, received cash of P7,500 from customers.
• On Nov. 30, incurred the following expenses: Wages – P2,125; Rent – P800;
Utilities – P450; and Miscellaneous – P275.
• On Nov. 30, paid creditors on account, P950.
STEP 3: POSTING
• POSTING – the process of transferring data from the journal to the
appropriate accounts in the ledger.
• LEDGER – a systematic compilation of a group of accounts. Also called “Book
of Final Entry”.
• Kinds of Ledger:
• General Ledger – the basic type of ledger; the “reference book” of the
accounting system and is used to classify and summarize transactions,
and to prepare data for basic financial statements.
• Subsidiary Ledger – a group of accounts with a common characteristic. It
is an addition to, and an extension of, the general ledger.
• WHY POST?
• To classify the effects of transactions on specific asset, liability, equity,
income and expense.
STEP 3: POSTING
• FORMAT OF LEDGERS:
STEP 3: POSTING
• Chart of Accounts - a listing of all accounts and their account numbers in the
ledger. It is arranged in the order that the accounts appear in the financial
statements, i.e., assets first, then followed by liabilities, equity, income and
expenses. The accounts should be numbered in a flexible manner to permit
indexing and cross-referencing.
STEP 3: POSTING
• Steps in Posting
• Transfer the date of the transaction from the journal to the ledger.
• Transfer the page number from the journal to the journal reference (J.R.)
column of the ledger.
• Post the debit figure from the journal as a debit figure in the ledger and
the credit figure from the journal as a credit figure in the ledger.
• Enter the account number in the posting reference column of the journal
once the figure has been posted to the ledger.
STEP 3: POSTING
STEP 3: POSTING
• Ledger Accounts after Posting
• At the end of each accounting period, the debit or credit balance of
each account must be determined to enable us to come up with a trial
balance.
• Each account balance is determined by footing (adding) all the
debits and credits.
• If the sum of an account’s debits are greater than the sum of its
credits, that account has a debit balance.
• If the sum of its credits is greater, that account has a credit balance.
STEP 4, 6 AND 9: PREPARING TRIAL BALANCE
• TRIAL BALANCE – a list of all accounts with their respective debit or credit
balances.
• Types of Trial Balance:
• Unadjusted Trial Balance
• Adjusted Trial Balance
• Post-Closing Trial Balance
• PURPOSE OF PREPARATION:
1) to verify the equality of debits and credits in the ledger at the end of
each accounting period or at any time the postings are updated; and
2) used as a control device that helps minimize accounting error.
STEP 4, 6 AND 9: PREPARING TRIAL BALANCE
• Errors that may be revealed by trial balance:
1. Journalizing or posting one-half of an entry.
2. Recording one part of an entry for a different amount than the other part.
3. Transposition Error – an error which occurs when the order of two numbers are
reversed.
4. Transplacement or Slide Error – an error which occurs when a decimal point
has been moved or misplaced.
• Errors that may not be revealed by trial balance:
1. Failure to record or post a transaction.
2. Recording the same transaction more than once.
3. Recording an entry but with the same erroneous debit and credit amounts.
4. Posting a part of a transaction correctly as a debit or credit but to the wrong
account.
STEP 4, 6 AND 9: PREPARING TRIAL BALANCE
• Steps in Locating Errors in the Trial Balance:
1. Prove the addition of the trial balance columns by adding the columns in the
opposite direction.
2. If the error does not lie in the addition, ascertain the exact amount of
difference between the two columns. The following will guide you on the type
of error that may have been committed:
a. If the error is divisible by 2, scan the trial balance to see whether a balance equal to
half the error has been entered in the wrong column.
b. If the error is divisible by 9, retrace the account balances on the trial balance to see
whether they are incorrectly copied from the ledger.
c. If the error is not divisible by 2 or 9, scan the ledger to see whether an account
balance in the amount of the error has been omitted from the trial balance, and
scan the journal to see whether a posting of that amount has been omitted.
3. Compare the accounts and amounts in the trial balance with that in the
ledger. Be certain that no account is omitted.
4. Recompute the balance of each ledger account.
5. Trace all postings from the journal to the ledger accounts.
STEP 5: ADJUSTING PROCESS
• ADJUSTING PROCESS – the analysis and updating of accounts at the end of
the period before the financial statements are prepared.
• ADJUSTING ENTRIES – the journal entries that bring the accounts up-to-date
at the end of the accounting period.
• WHY ADJUST?
• To reflect in the accounts information on economic activities that have
occurred but have not yet recorded.
• To measure properly the profit for the period, and to bring related asset
and liability accounts to correct balances for the financial statements.
• To ensure that the revenue and expense recognition principles are
followed, resulting to financial statements reporting the effects of all
transactions at the end of the period.
STEP 5: ADJUSTING PROCESS
Types of Adjustments
• Deferral – the postponement of the recognition of “an expense already paid
but not yet incurred”, or of “revenue already collected but not yet earned”.
• Prepaid Expenses – items that have been initially recorded as assets but
are expected to become expenses over time or through the normal
operations of a business.
Ex. Supplies, Prepaid Rent, Prepaid Insurance
• Unearned Revenues – items that have been initially recorded as liabilities
but are expected to become revenues over time or through the normal
operations of a business.
Ex. Subscriptions, Advances
STEP 5: ADJUSTING PROCESS
Types of Adjustments
• Accrual – the recognition of “an expense already incurred but unpaid”, or
“revenue earned but uncollected”.
• Accrued Expenses – expenses that have been incurred but have not yet
been paid.
Ex. Unpaid salaries and wages, unpaid utilities
• Accrued Revenues – revenues that have been earned but have not
been recorded in the accounts.
Ex. Unbilled services, Interest earned for which cash have not yet
been received/credited
STEP 5: ADJUSTING PROCESS
Types of Adjustments
• Depreciation – the decrease in the usefulness of an item of property, plant
and equipment due to its normal usage in the entity’s operation.
Depreciation is essentially a form of a deferral.
• Impairment Losses – the decrease in the value of an asset due to a decline
in benefit that can be derived from an asset.
Ex. Adjustment for bad debts (receivable impairment)
STEP 5: ADJUSTING PROCESS
STEP 5: ADJUSTING PROCESS
STEP 7: PREPARING FINANCIAL STATEMENTS
• WORKSHEET – a columnar sheet or paper used as a tool and summary device
in the preparation of the adjustments, financial statements, closing entries
and post-closing trial balance.
• This simplifies the summarizing, adjusting and closing phase of the accounting
cycle.
STEP 7: PREPARING FINANCIAL STATEMENTS
• Steps in Preparing the Worksheet
1. Write the heading of the worksheet with the following components:
a. First Line – name of the company
b. Second Line – name of the document (Worksheet)
c. Third Line – the accounting period covered
2. Copy all the account titles and the respective account codes used by
the company in the No. and Account Title column. Then, enter the
respective account balances per the general ledger in the “Trial
Balance” columns and total the amounts.
3. Enter the adjusting entries in the “Adjustments” columns and total the
amounts.
STEP 7: PREPARING FINANCIAL STATEMENTS
• Steps in Preparing the Worksheet
4. Compute each account’s adjusted balance by combining the
unadjusted trial balance and the adjustment figures. Enter the adjusted
amounts in the “Adjusted Trial Balance” columns.
5. Extend the asset, liability and equity amounts from the adjusted trial
balance columns to the “Balance Sheet Columns”. Extend the revenue,
costs and expense amounts to the “Income Statement” columns. Total
the statements columns.
6. Compute the difference between the debit and credit side of the
“Income Statement” columns. The difference represents the profit or loss
for the period. (If the credit side is larger than the debit, there is a profit.
Otherwise, there is a loss.) Enter the profit or loss figure as a balancing
amount in the “Income Statement” and “Balance Sheet” columns.
Compute for the final column total.
STEP 7: PREPARING FINANCIAL STATEMENTS
• FINANCIAL STATEMENTS – structured reports which are used to accumulate
information about the entity’s financial position as of a particular period and
the financial performance and changes in the company’s financial
condition for a particular period and report them to interested users.
• Components of a Complete Set of Financial Statements
• Statement of Financial Statement – a formal statement which presents the
financial condition of an entity in terms of its assets, liabilities and the
equity as of a particular period.
STEP 7: PREPARING FINANCIAL STATEMENTS
• Formats of Balance Sheet/Statement of Financial Position
• Report Form – a balance sheet format which simply lists the assets, then
the liabilities and owner’s equity in vertical sequence.
STEP 7: PREPARING FINANCIAL STATEMENTS
• Account Form – a balance sheet format which lists the assets, liabilities
and equity similar to a T-Account.
STEP 7: PREPARING FINANCIAL STATEMENTS
• FINANCIAL STATEMENTS – structured reports which are used to accumulate
information about the entity’s financial position as of a particular period and
the financial performance and changes in the company’s financial
condition for a particular period and report them to interested users.
• Components of a Complete Set of Financial Statements
• Statement of Financial Statement – a formal statement which presents the
financial condition of an entity in terms of its assets, liabilities and the
equity as of a particular period.
• Statement of Comprehensive Income – a statement that shows the results
of operations for a given period of time. It shows whether the company
made a profit or incurred a loss.
STEP 7: PREPARING FINANCIAL STATEMENTS
• Formats of Income Statement/Statement of Comprehensive Income
• Nature of Expense Method – a statement of comprehensive income
format that presents the expenses within the profit or loss according to
their nature (e.g. depreciation, advertsing costs, salaries and wages, etc.)
STEP 7: PREPARING FINANCIAL STATEMENTS
STEP 7: PREPARING FINANCIAL STATEMENTS
• Formats of Income Statement/Statement of Comprehensive Income
• Nature of Expense Method – a statement of comprehensive income
format that presents the expenses within the profit or loss according to
their nature (e.g. depreciation, advertsing costs, salaries and wages, etc.)
• Function of Expense (Cost of Sales) Method - a statement of
comprehensive income format that presents the expenses within the
profit or loss according to their function, i.e., as part of costs of sales, or
costs of distribution, or costs of administration.
STEP 7: PREPARING FINANCIAL STATEMENTS
STEP 7: PREPARING FINANCIAL STATEMENTS
• FINANCIAL STATEMENTS – structured reports which are used to accumulate
information about the entity’s financial position as of a particular period and
the financial performance and changes in the company’s financial
condition for a particular period and report them to interested users.
• Components of a Complete Set of Financial Statements
• Statement of Financial Statement – a formal statement which presents the
financial condition of an entity in terms of its assets, liabilities and the
equity as of a particular period.
• Statement of Comprehensive Income – a statement that shows the results
of operations for a given period of time. It shows whether the company
made a profit or incurred a loss.
• Statement of Changes in Equity – a statement that shows the beginning
and ending balance of the equity and summarizes the changes that
occurred on it for a particular period.
STEP 7: PREPARING FINANCIAL STATEMENTS
STEP 7: PREPARING FINANCIAL STATEMENTS
STEP 7: PREPARING FINANCIAL STATEMENTS
STEP 7: PREPARING FINANCIAL STATEMENTS
• Components of a Complete Set of Financial Statements
• Statement of Cash Flows – a statement that shows the net increase or
decrease in cash during a particular period by providing information
about the sources and uses of cash.
• Notes to the Financial Statements – accompanying notes, usually placed
as annexes to the financial statements, that
• present information about the basis of preparation of the financial
statements and the specific accounting policies used;
• disclose the information required by the accounting standards that is
not presented elsewhere in the financial statements; and
• provide information that is not presented elsewhere in the financial
statements, but is relevant to an understanding of any of them.
STEP 7: PREPARING FINANCIAL STATEMENTS
• Relationships Among the Financial Statements
• The statement of comprehensive income reports all income and
expenses during the period. The profit or loss is the final figure in this
statement.
• The statement of changes in equity considers the profit or loss figure from
the income statement as one of the determining factors that explains the
change in owner’s equity.
• The statement of financial position reports the ending equity, taken
directly from the statement of changes in equity.
• The statement of cash flows reports the net increase or decrease in cash
during the period and ends with the cash balance reported in the
balance sheet. This statement is prepared based on information from the
income statement and the balance sheet.
STEP 8: CLOSING THE BOOKS
• CLOSING THE BOOKS – the process of making the books ready for the next
accounting cycle at the end of the accounting period, when accounts are
closed and ledgers are ruled and balanced.
• CLOSING ENTRIES – journal entries made at the end of each accounting year
to close all nominal accounts.
• Steps in Closing the Books:
1. Prepare the closing entries
a. Close all the income accounts by debiting revenue and income
accounts and credit “Income Summary” account.
b. Close all the expense accounts by debiting “Income Summary”
account and credit the expense accounts.
c. Determine the balance of the “Income Summary” account and
close the balance to the proper equity account.
d. If drawing account is used, said account is also closed to the capital
account.
STEP 8: CLOSING THE BOOKS
• Steps in Closing the Books:
2. Post the closing entries to the proper accounts in the ledger.
3. Foot the balances in each side of the account.
4. Determine the balance of each account by determining the difference
between the debit and credit balance.
5. Close the ledger by “double-ruling” both sides of the account.
STEP 10: REVERSAL
• REVERSING ENTRIES – journal entries made at the beginning of the new
accounting period to reverse certain adjusting entries in the immediately
preceding period.
• WHY REVERSE?
1. To facilitate the recording of cash receipts and disbursements in the
next accounting period;
2. To provide convenience in recording the next accounting period’s year-
end adjustments for accruals; and
3. To promote consistency in the application of accounting procedures.
• Adjusting entries that may be reversed:
• All accruals
• Prepayments initially recorded using the expense method;
• Unearned income initially recorded using the income/revenue method