REVIEW OF THE ACCOUNTING PROCESS
FINANCIAL ACCOUNTING AND REPORTING
I. WHAT IS ACCOUNTING CYCLE
• A series of well-defined steps leading to the
communication of the effects of a business
transaction. The accounting cycle implements
the accounting process from period to period.
• A set of procedures used in identifying, recording,
classifying, and interpreting information related to the
transactions and other events of a business enterprise.
II. STEPS IN ACCOUNTING CYCLE
1. Gather business documents and analyze
business transactions
2. Journalize business transactions
3. Post to the general ledger
4. Prepare trial balance
5. Journalize and post the adjusting entries
6. Prepare and complete the worksheet
7. Prepare financial statements
8. Journalize and post the closing entries
9. Prepare post-closing trial balance
10. Journalize and post the reversing entries
III. INDENTIFYING AND ANALYZING EVENTS AND
TRANSACTIONS
• The process of selecting a transaction or event
and analyzing its impact on financial position
• An event or transaction is selected for recording
if it complies with the criteria for accountable
events set under double-entry principles.
• Dual effects principle – each recorded event affects at
least two items in the financial accounting record
• Events are analyzed to determine their effects
on financial position of the enterprise.
Accordingly, the effects of the events on the
financial position of the enterprise are measured
and represented by money amounts.
• Business documents/ source documents –
original source materials evidencing a
transaction (e.g. sales invoice, purchase invoice,
official receipts, debit or credit memoranda, etc.)
IV. JOURNALIZING
V. POSTING
• Journalizing is the process of recording transactions
by means of a journal entry in the journal
• This process entails the recording in
chronological order of the accountable events,
by means of debits and credits, in a journal.
• Journal entries provide a systematic method for
summarizing a business event’s effect on the
basic accounting equation.
• Journal – a formal record or book of original entry
where transactions are recorded for the first time
of information in double-entry system. An account is
composed of three parts; namely, the name of the
• Recognition – process of incorporating in the statement
of financial position or statement of comprehensive
income an item that meets the definition of an element
and satisfies the criteria for recognition
• Types of journal entries as to the time prepared:
a. Current entries – entries to record
transactions completed by the business
during a given period
b. Adjusting entries – entries made at the
end of the accounting period to update
certain amounts so that they reflect
correct balances at a designated time
c. Closing entries – entries made at the end of the
accounting period after adjustments, by means
of closing nominal accounts to a summary
account transferring the balances to Capital
d. Reversing entries – entries made at the start
of the subsequent accounting period to
reverse certain adjusting entries made in the
immediately preceding accounting period
e.Correcting entries – entries made to
correct entries made in error
f. Reclassification entries – entries that
transfer an item from one account to
another that may clearly describe the
nature of the item transferred.
• Types of Journals
a. General journal – simple journal with two
money column. Records all transactions
not recorded in special journals.
b. Special journal – multi-column book to record
transactions of a similar nature. This type of
journal records frequently recurring
transactions
• Some Commonly-used Types of Special Journals
a. Cash receipts journal – records all cash receipts
b. Cash disbursement journal – records all
cash disbursements
c. Sales journal – records sales made on account
d. Purchase journal – records purchases
made on account
• The process of transferring data from the journal to the
appropriate accounts in the ledger. Posting serves to
classify the effects of transactions on specific asset,
liability, proprietorship, revenue and expense accounts.
• Posting is done by transferring debits and
credits to ledger accounts
• Ledger – systematic compilation of a group of accounts
• Account – accounting devices used to summarize change in
asset, liability or capital. It is used as the storage unit
account (account title), the left side of the account
(debit), the right side of the account (credit).
 • Chart of accounts – summarizes the existing
accounts used by a particular entity
• Types of Ledger
a. General ledger – contains all accounts
appearing in the financial statements
b. Subsidiary ledger – Supporting ledger
consisting of a group of accounts of similar
nature, the total of which is in agreement
with a controlling account in the general
ledger. Subsidiary ledger contains
supporting detail for the balances of
control accounts in the general ledger.
• Types of Accounts
a. Real account/Permanent account –
accounts that are reported in the
statement of financial position (i.e.,
asset, liability and capital accounts)
b. Nominal account/Temporary account –
accounts that are reported in the
statement of comprehensive income
(i.e., revenue and expense accounts)
c. Mixed account – account that includes a part
that should be reported the income statement
and a part that should be reported in the
statement of financial position. This happens
before preparing adjusting entries (e.g. prepaid
expenses and unearned revenue)
d. Contra account – account with a balance that is
opposite of the normal balance; normally shown as a
reduction to a specific account (e.g., accumulated
depreciation, discount on notes payable and sales
returns and allowances)
e. Adjunct account – valuation account that
increases the book value or carrying value of
a specific account (e.g., premium on notes
receivable and premium on bonds payable)
VI. TRIAL BALANCE
• The process of listing down of accounts with open
balances in order to prove the mathematical
accuracy of the debits and credits in the ledger
• Types of trial balances as to the time of preparation
a. Unadjusted trial balance – prepared before
the preparation of adjusting entries. Includes
real, nominal and mixed accounts.
b. Adjusted trial balance – prepared after
VIII.
adjusting entries are journalized and posted.
Includes real and nominal accounts
c. Post-closing trial balance – prepared
after closing entries are journalized and
posted. Includes real accounts only.
IX. FINANCIAL STATEMENTS
• Financial statements are means by which the
information is accumulated and processed in
financial accounting
• Components of the Basic Financial Statements
a. Statement of Financial Position – a
formal statement showing assets,
• Errors revealed by a trial balance
a. Transplacement error – error in placing decimal
points (e.g. P9,600.00 instead of P96,000.00)
b. Transposition error – switching of two adjacent
numbers when posting a transaction (e.g.
P9,600.00 instead of P6,900.00)
c. Error in posting one side of an entry
d. Omission in posting one side of an entry
• Errors not revealed by a trial balance
a. Wrong computation
b. Wrong classification of account
c. Double-posting both sides of an entry
d. Omission in posting both sides of an entry
e. Omission in journalizing a transaction
VII. ADJUSTING ENTRIES
• Adjusting entries are made at the end of the accounting
period to update or bring to their correct balances certain
asset, liability, revenue or expense accounts.
• All relevant information that has not been recorded must
be determine, recorded and posted so that accounts are
updated prior to preparing financial statements.
• Purposes of adjusting entries
a. To take up unrecorded income and
expenses for the period
▪ Accrued expense – expenses incurred, but
not to be paid until a following period
▪ Accrued income – income earned, but not to
be received in cash until a following period
b. To split mixed accounts into their real
and nominal elements
▪ Prepaid expense – recorded cash payments for
benefits not yet received or only partially so
▪ Unearned income – recorded cash receipts
for services to be rendered in the future or
only partially rendered at the reporting date
▪ Bad debts/Doubtful accounts – estimated amount
of uncollectible accounts receivable charged to
current period’s income as bad debts expense
▪ Inventory
▪ Depreciation – systematic allocation of an
asset’s cost to expense and a reduction, using
contra accounts, in carrying value for a period
during which the asset is used in operations
WORKSHEET
• Worksheet – is an analytical device used in accounting to
facilitate the gathering of data for adjustment, the
preparation of financial statements and closing entries.
liabilities, capital or the financial
position of an enterprise as of a
given date.
b. Statement of Comprehensive
Income – presents the revenue,
expenses, gains and losses both
realized and unrealized, that are the
 result of the enterprise’s profit-directed • Reversing entries – made on the first day of the succeeding
activities during a given period of time accounting period to reverse certain adjusting entries done in an
c. Statement of Changes in Equity – shows immediately preceding period
the movements in the elements of the • Adjustments requiring reversing entries:
components of capital/stockholders’ a. Accrued expense
equity which includes the net income and b. Prepaid expense under expense method
items such as withdrawals, appropriations c. Unearned income under income method
and adjustments of net income of prior
periods
d. Statement of Changes in Cash Flows – is a
statement that summarizes the cash inflows
and outflows arising from operating,
financing and investing activities of the
enterprise for a given period of time
e. Notes to Financial Statements – contain
explanatory material, and disaggregation
of certain items in the face of the financial
statements, as well as other significant
quantifiable and non-quantifiable
information that are necessary on making
economic decisions

X. CLOSING ENTRIES
• Closing the books is the process of preparing closing
entries and ruling and balancing real accounts. This
means that all nominal/temporary account balances
are brought to zero at the end of the period.
• Closing entries – entries prepared at the end of
the accounting period to “empty” or bring to zero
all nominal accounts in the ledger
• Steps in preparing closing entries
a. Close all nominal accounts to Income
and Expense Summary account
b. Close all Income and Expense
Summary account to Drawing account
c. Close Drawing account to Capital

XI. POST-CLOSING TRIAL BALANCE

• The purpose of a post-closing trial balance is to
prove the equality of the debits and credits in
the ledger after the closing process

XII. REVERSING ENTRIES

• Reversing entries are prepared for the convenience in
recording accruals and consistency in recording
deferrals
QUIZZER – THEORIES 2. Also known as the recording phase of accounting. The
systematic and chronological recording of transactions
1. This is the means by which a reporting entity records and events in the books of account is known as
and stores financial and managerial information from a. Accounting
its transactions or economic events so that it can b. Bookkeeping
retrieve and report the information in an accounting c. Record-keeping
statement d. Auditing
a. Accounting system
b. Bookkeeping system 3. The series of well-defined steps followed and
c. Internal control system completed within an accounting period to record
d. Ledger system transactions and prepare financial statements under
double-entry bookkeeping system is
a. Operating cycle
 b. Business cycle
c. Accounting cycle
d. Cash conversion cycle
4. Which one of the following is among the conditions
that will qualify a situation, particular action or set of
circumstances as an accountable event?
a. It has happened or will happen within a short
period of time
b. It affects an accounting element(s) either
increasing or decreasing it
c. It involves an exchange of values between the
business enterprise and a third party
d. It can be measured accurately in monetary terms
5. The system of bookkeeping that recognizes the two-
fold effect of an accountable event is known as
a. Double-entry
b. Single-entry
c. Cash basis
d. Accrual basis
6. Double-entry bookkeeping requires that
a. Every transaction affect both an asset account
and either a liability or owner’s equity account
b. The number of ledger accounts with debit
balances is equal to the number with credit
balances
c. The total peso amount of debit entries posted to
the general ledger is equal to the total peso
amount of the credit entries
d. The number of debit entries posted to the
ledger equals the number of credit entries
14. Which of the following operations can be performed by a
computer without requiring an accountant’s judgment?
a. Analyzing the events
7. The system of bookkeeping whereby, as a general
rule, only cash and personal accounts are recognized
and is deemed to be incomplete bookkeeping
a. Double-entry
b. Single-entry
c. Cash basis
d. Accrual basis
8. All of the following are disadvantages of the single-
entry bookkeeping system, except:
a. Accounting records are incomplete
b. Accrual basis financial statements cannot be prepared
c. Internal control is inadequate
d. Financial statements are not likely to be fairly
presented in accordance with GAAP
9. The primary characteristics that distinguishes
double entry bookkeeping from single-entry is
a. It recognizes the two-fold effect of each event
affecting the enterprise
b. A complete set of journals and ledgers is maintained
c. A trial balance is periodically prepared
d. Accrual basis accounting is used
10. The basic classification category and storage unit
for information in a double entry system is the
a. Business document
b. Journal
c. Ledger
d. Account
11. Which is false concerning the rules of debit and credit?
a. The left side of an account is always the debit
side and the right side is always the credit side
b. The normal balance of any account appears on
the side used for recording increases
c. The rules of debit and credit cannot be
amended over time
d. The word debit means to increase and the word
credit means to decrease
12. Which of the following operations in the financial accounting
process determine how events affect the assets, liabilities,
owners’ equity, revenue, and expenses of the enterprise?
a. Analyzing the events
b. Measuring the effects
c. Recording the events
d. Summarizing the recorded effects
13. Which of the following operations involves the
assignment of peso amounts to accountable
events?
a. Analyzing the events
b. Measuring the effects
c. Recording the events
d. Summarizing the recorded effects
b. Measuring the effects
c. Recording the events
d. Summarizing the recorded effects

15. The first step in the accounting cycle is
a. Record transactions in the journal
b. Analyze transactions from source documents
c. Post journal entries to general ledger accounts
d. Adjust the general ledger accounts
16. At what step in the accounting cycle is GAAP
typically applied?
a. Journalizing
b. Posting
c. Trial balance preparation
d. All of the above
17. Transactions and events are analyzed according to
the rules of debit and credit
a. After selecting the event and before an entry is
recorded in the journal
b. After the entry is recorded in the journal and
before it is posted in the ledger
c. When adjusting entries are prepared
d. After adjusting entries and before preparation of
the financial statements and closing entries
18. Which of the following documents does not initiate
an entry to be made in the books of accounts?
a. Sales invoice
b. Purchase invoice
c. Purchase order
d. Credit memorandum
19. A firm’s chart of accounts is
a. A flowchart of all transactions
b. A list of names of all account titles used by an
economic entity
c. An accounting procedures manual
d. A journal
20. Which of the following statements states the primary
purpose of a general journal?
a. The general journal provides a continuing balance of
the amount to date in each of the temporary accounts
b. The general journal provides an organized summary,
in chronological order, of the transactions of the
entity
c. The general journal directly provides the data
for a trial balance
d. The general journal eliminates the need for
control accounts in the ledger
26. A listing of the components of account balances which
relieves the general ledger of detail thereby facilitating
the preparation of a trial balance is known as
a. Subsidiary ledger
21. Which is false concerning the use of special journals?
a. Sales of merchandise are recorded in the sales
journal and sale of any item for cash is recorded
in the cash receipts journal
b. Only cash sales are recorded in the cash receipts
journal
c. Payment of interest incurred during the year arising from
a bank loan is recorded in the cash disbursement journal
d. Purchase of property and equipment on account
is recorded in the general journal
22. One of these is not an advantage of using special journal
a. Division of labor is possible
b. Possibility of error is minimized
c. Number of postings is reduced
d. Space and effort in recording transactions is reduced
23. Which of the following statements pertaining to the
use of special journals is (are) true?
Statement I: Transactions that cannot be
appropriately recorded in a special journal are
recorded in the general journal
Statement II: If entity is using a one-column sales
journal, sale of merchandise on account are
recorded in the sales journal whiles cash sales are
recorded in the cash receipts journal.
Statement III: Voucher register and check register
are also classified as special journals.
a. Only Statement I is true
b. Only Statement II is true
c. Statements I and II are true
d. All of the statements are true
24. A systematic compilation of account titles of asset, liability,
equity, revenue and expense accounts which is also called a
“book of final entry” is known as
a. Journal
b. Ledger
c. Worksheet
d. Trial balance
25. Which of the following statements is incorrect?
a. Accounts are arranged in the general ledger following
the
“financial statement order”
b. The ledger is also known as the book of final entry
c. Posting is the process of transferring the debit
and credit changes in account balances from
the ledger to the journal
d. A ledger account shows in one place all the
information about changes in specific asset or
liability, or owner’s equity
b. Private ledger
c. Worksheet
d. Register
27. Which of the following types of accounts measure
economic flows over a period of time?
a. Real accounts
b. Nominal accounts
c. Mixed accounts
d. Summary accounts
28. An auxiliary account that has the same balance as
the principal account is a (an)
a. Contra account
b. Adjunct account
c. Offset account
d. Controlling account
29. Which of the following best defines a controlling account?
a. A summary account in the general ledger that is
supported by detailed accounts in a subsidiary ledger
b. A listing of the balances in all accounts
c. An account which increases due to sale of goods or
services during the normal operations of a business
d. A chronological listing of all transactions for a
specific time period
30. Which of the following statements is false?
a. Before year-end adjustments are prepared, a
building account is a mixed account
b. A contra account has the opposite balance of its
principal account while an adjunct account has
the same balance as its principal balance
c. Contra accounts appear only in the balance sheet
d. A principal account is an account that can stand
alone
31. A notation entered in a journal or ledger, not intended to be
formally incorporated in the accounts, which describes a
situation or event, with or without money values is knows as
a. Footnote
b. Negative entry
c. Memorandum entry
d. Reciprocal entry
32. A trial balance will disclose that an error has been made
in
a. Entering an amount on the wrong side of an account
b. Mathematical computation of the interest
expense on a note payable
c. Posting an amount to the wrong ledger account
d. Posting a journal entry twice in the general ledger
Statement III: To accomplish the objective of
offsetting the revenue of the period with all the
expenses incurred in generating that revenue
33. A trial balance that contains real accounts only is
a. Interim balance
b. Unadjusted trial balance
c. Adjusted trial balance
d. Post-closing trial balance
34. The primary purpose of preparing a trial balance is
to determine that
a. The ledger contains an equal peso amount of
debit and credit entries
b. The ledger contains an equal number of debit
and credit entries
c. The number of ledger accounts with debit balances is
equal to the number of accounts with credit balances
d. Each transaction was recorded with equal
amounts of debits and credits
35. Which of the following statements regarding a trial
balance is incorrect?
a. A trial balance should always balance
b. A trial balance is a test of the equality of the
debits and credits in the ledger
c. A trial balance that is in balance proves that no
error of any kind has been made in the
accounts during the accounting period
d. A trial balance is useful in the preparation of the
income statement and the balance sheet
36. Adjusting entries are needed
a. Whenever revenue is not received in cash
b. Whenever expenses are not paid in cash
c. Primarily to correct error in the initial recording
of business transactions
d. Whenever transactions affect the revenue or
expenses of more than one accounting period
37. Which of the following concepts is least related to
adjusting entries
a. Accrual
b. Approximation
c. Materiality
d. Matching of cost against revenue
38. Adjusting entries involve
a. Only real accounts
b. Only nominal accounts
c. Only capital accounts
d. At least one real and one nominal account
39. Which one of the following is a purpose of adjusting entries?
Statement I: To apportion the proper amounts of
revenue and expense to the current accounting period
Statement II: To establish the proper amounts of
assets and liabilities in the balance sheet
Statement IV: To prepare the revenue and expense
accounts for recording transactions of the following period
 a. I and II only
b. II and III only
c. I, II and III only
d. All of these
40. The entry to record depreciation is an example of an
adjusting entry
a. To apportion a recorded cost
b. To apportion unearned revenue
c. To record unrecorded expense
d. To record unrecorded revenue
41. Assume that a company’s fiscal year ends on December 31,
which of the following events involves an adjusting entry that
would be affected by how the event was originally recorded?
a. Sale of merchandise on account
b. Signing a one-year lease for a building
c. Salaries earned by employees this year will be
paid next year
d. Payment of rent for 6 months coverage starting
October 1 of current year
42. If the advance payment of an expense was initially recorded
in an expense account, the adjusting entry will involve
a. A debit to the asset account and a credit to the expense
account in the amount of the unexpired portion
b. A debit to the asset account and a credit to
expense in the amount of the expired portion
c. A debit to expense and a credit to the asset
account in the amount of the unexpired portion
d. A debit to expense and a credit to the asset
account in the amount of the expired portion
43. Rent revenue collected one month in advance
should be accounted for as
a. Revenue in the month collected
b. Accrued liability
c. A separate item in equity
d. Current liability
44. An analytical device used by accountants to
facilitate the gathering of data for adjustments, and
the preparation of adjusting and closing entries
a. Trial balance
b. Worksheet
c. Account
d. Ledger
45. Which of the following is not a factor to consider in
determining the money columns of a periodic worksheet?
a. The nature of business
b. The concept or basis used in accounting for
revenue and expenses
c. The amount of capital of the business
d. The type of ownership of the business
46. The purpose of making closing entries is to
a. Prepare revenue and expense accounts for the
recording of the next period’s revenue and expenses
b. Enable the accountant to prepare financial
statements at the end of the accounting period
c. Establish new balances in the balance sheet
accounts
d. Reduce the number of revenue and expense accounts
47. The effect of closing entries is to
a. Change assets
b. Change liabilities
c. Change capital
d. Change debit balances of all accounts into
credits and vice-versa
48. The purpose of the post-closing trial balance is to
a. Provide the account balances for preparation of
the balance sheet
b. Ensure that the ledger is in balance for the start
of the next period
c. Aid the journalizing and posting of the closing entries
d. Ensure that the ledger is in balance for
completion of the worksheet
49. Reversing entries are used
a. Primarily to simplify the bookkeeping during the
next accounting period
b. To adjust the inventory account under a periodic
inventory system
c. To close the income summary account
d. To establish appropriate contra accounts
50. Which of the following steps in the accounting cycle
are optional?
a. Trial balance and adjusting entry
b. Trial balance, worksheet and adjusting entry
c. Worksheet, preparation of financial statements,
closing entries
d. Worksheet, post-closing trial balance and
reversing entries