PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY

Overview of the Accounting Cycle 1
 LEARNING
OBJECTIVES

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 2
 Basic Accounting: Concepts,
Techniques
and Conventions

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 3
DEFINITION OF ACCOUNTING

Accounting is the art of recording,

classifying and summarizing in a
significant manner and in terms of
money, transactions and events which
are, in part at least, of a financial
character and interpreting the results
thereof.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 4
FUNCTIONS OF ACCOUNTING

1. Recording of data
2. Classifying of data
3. Summarizing of data
4. Interpreting the results

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 5
MAJOR USERS OF ACCOUNTING
INFORMATION
1. owners of the business
2. management of the business
3. banks or creditors of the business
4. the government or its agencies
5. prospective investors
6. consumers
7. employees of the business
8. the general public

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 6
 The Elements of Accounting

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 7
THE ACCOUNTING ELEMENTS

 Assets
 Owner’s Equity
 Liabilities
 Revenue
 Expenses

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 8
ASSETS

 Assets are items of worth owned by

the business organization in
conducting its operations.
 Examples:
 Cash
 Receivables
 Investments
 Property, Plant and Equipment

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 9
TYPES OF ASSETS

1. Current assets
 those assets which are readily converted
into cash within a twelve-month period or
within the normal operating cycle of a
business.
 As a guide – non-monetary assets that are
convertible to cash within a year or the
normal operating cycle of a business are
categorized as current assets.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 10
TYPES OF ASSETS (cont’d)

2. Non-current assets
 those which are not readily convertible into cash
within a twelve-month period or within the normal
operating cycle of a business and, thus, it has a
long-term nature. Also known as long-term
assets.
 These assets are mostly not intended to be sold
by the business entity. Ex. - land, building,
machinery, motor vehicles, equipment and
furniture.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 11
LIABILITIES

 Amounts owed by the business entity

to outside parties other than its owner
and as such these are seen as
“debts” and obligations of the
business.
 Examples – accounts payable, notes
payable, loans, salaries payable

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 12
TYPES OF LIABILITIES

1. Current Liabilities
 debts and obligations which should be
paid within a twelve-month period or
within the normal operating cycle of a
business.
 Examples are:
 Creditors
 accounts payable
 salaries payable.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 13
TYPES OF LIABILITIES (cont’d)

2. Non-current Liabilities
 debts and obligations which will be
paid over more than a twelve-month
period and, thus, it has a long-term
nature. Also known as long-term
liabilities.
 Examples
 mortgage loan
 long-term notes payable

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 14
OWNER’S EQUITY

 Also known as owner’s contribution,

investment, proprietorship, net worth
or capital to the business.
 Outstanding claim of the owners in the
assets of a business after satisfying the
claims of the creditors.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 15
REVENUE & EXPENSES

 Revenue - amount made or earned by

the business entity as a result of its
operations.
 Expenses – expenditures associated
with earning revenue. These are
generally utilized in the period in which
they incurred.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 16
PROFIT/LOSS CALCULATION
The primary objective of most business
organizations is to make earnings or profits.

REVENUE > EXPENSES = NET PROFIT

REVENUE < EXPENSES = NET LOSS

REVENUE = EXPENSES = BREAK-EVEN

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 17
ACCOUNTING EQUATION
The Fundamental Accounting Equation:

Assets = Liabilities + Owners’ Equity

The accounting equation may also be

expressed in two other forms:

(1) OWNER’S EQUITY = ASSETS – LIABILITIES

(2) LIABILITIES = ASSETS – OWNER’S EQUITY

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 18
EXPANDED ACCOUNTING EQUATION

A=L+C+R–E–D
Where:
A = Assets
L = Liabilities
C = Capital
R = Revenue
E = Expenses
D = Drawings

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 19
PHASES OF ACCOUNTING

 Recording Phase
 Classifying Phase
 Summarizing Phase
 Interpreting Phase

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 20
PHASES OF ACCOUNTING (cont’d)

 Recording Phase –
refers to the procedure of methodically and
chronologically documenting business
transactions in the appropriate accounting
books.

 Classifying Phase -
refers to the procedure of sorting accounting
entries and grouping them into same type such
as asset accounts, liability accounts, owner’s
equity accounts, revenue accounts and expense
accounts.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 21
PHASES OF ACCOUNTING (cont’d)

 Summarizing Phase –
refers to the procedure of abridging or
summing up of accounting entries that were
classified in the classifying phase into more
useful financial statements.

 Interpreting Phase –
refers to the procedure of analyzing the
financial statements done in the summarizing
phase to provide answers to major users of
financial information.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 22
PRINCIPLES OF DOUBLE-ENTRY
BOOKKEEPING SYSTEM

(1) Each business transaction involves a

worth received and a worth given away;

(2) The balance of the accounting equation

should always be conserved, that is, the
accounting equation should still be
balance after each business transaction.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 23
DEBIT AND CREDIT ENTRY
Double-entry bookkeeping system always
records a transaction using two entries:
 Debit entry deals with the worth received
(things-of-value received) by the business
entity.

 Credit entry deals with the worth given away

(things-of-value given away) by the business
entity.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 24
DEBIT AND CREDIT ENTRY (cont’d)
For you to understand further the double-entry
bookkeeping system, study the following business
transactions:
The business purchase a motor vehicle for P500,000 from
David Car Sales paid in cash.
worth received: motor vehicle worth P500,000
worth given away: cash of P500,000
What is the accounting entry?
Debit entry – transportation equipment worth P500,000
Credit entry – cash-on-hand of P500,000

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 25
RULES OF DEBIT AND CREDIT

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 26
RULES OF DEBIT AND CREDIT (cont’d)

 Rule 6: An owner’s equity is decreased by a

debit entry.
 Rule 7: A revenue is increased by a credit entry.
 Rule 8: A revenue is decreased by a debit entry.
 Rule 9: An expense is increased by a debit entry.
 Rule 10: An expense is decreased by a credit
entry.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 27
 The Accounting Cycle

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 28
10 STEPS OF ACCOUNTING CYCLE

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 29
Step 1: Identify Transactions

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 30
Step 2: Journalizing

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 31
Step 3: Posting to Ledger

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 32
Step 4: Unadjusted Trial Balance

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 33
Step 5: Adjusting Entries

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 34
Step 5: Adjusting Entries (cont’d)

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 35
Step 5: Adjusted Trial Balance

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 36
Step 7: Financial Statements Preparation

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 37
Step 8: Closing Entries

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 38
Step 9: Post Closing Trial Balance

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 39
Step 10: Reversing Entries

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 40
 Financial Statements
(Corporation)

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 41
FINANCIAL STATEMENTS
 Summarized reports of accounting transactions
 Two-fold purpose: to communicate to users:
 the effect of operating activities during a specified period of
time; and
 the business’ financial position at the end of the period
 Types of financial statements:
 Statement of Profit or Loss a.k.a. Income Statement
 Statement of Changes in Equity (Sole Proprietor)
 Statement of Changes in Partner’s Equity (Partnership)
 Statement of Retained Earnings (Corporation)
 Statement of Financial Position a.k.a. Balance Sheet
 Statement of Cash Flows

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 42
INCOME STATEMENT
 Measures the operating performance of the
corporation by matching its accomplishments
(revenue from customers, which is usually
called sales) and its efforts (cost of goods sold
and expenses).

 Measures performance for a span of time

 Also known as Profit and Loss Statement

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 43
INCOME STATEMENT (cont’d)
 Revenues - inflows of assets either from the sale
of goods or the performance of services

 Expenses - outflows or other uses of assets to

produce revenues over expenses

 Net income (sometimes referred to as earnings

or profit) is the excess of revenues over
expenses, including tax expense

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 44
INCOME STATEMENT (cont’d)

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 45
STATEMENT OF RETAINED EARNINGS
 is a financial statement that outlines the changes in
retained earnings for a company over a specified
period.

 Retained earnings are profits held by a company in

reserve in order to invest in future projects rather than
distribute as dividends to shareholders.

 Analysts can look at the retained earnings statement

to understand how a company intends to deploy its
profits for growth.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 46
STATEMENT OF RETAINED EARNINGS

Rundell, Inc.
Statement of Retained Earnings
For the year ended December 31, 20Y8

Retained Earnings – Jan 1 $ 202,300

Add: Net Income 108,000
Total $ 310,300
Less: Dividends 28,000
Retained Earnings – Dec 31 $ 282,300

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 47
BALANCE SHEET

 Reports the financial position of a

business at a specific point in time

 Often called the “Statement of

Financial Position”

 Equation: Assets = Liabilities + Owners’

Equity

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 48
BALANCE SHEET (cont’d)

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 49
STATEMENT OF CASH FLOWS

 Prepared by analyzing changes in balance

sheet amounts and the data in the income
and retained earnings statements.
 The financing (i.e. obtaining financial
resources) and investing (i.e. using financial
resources) activities of a company are of
considerable interest to users of financial
information because those activities change
the financial position of the business

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 50
STATEMENT OF CASH FLOWS

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 51
 Financial Statements
(Partnerships)

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 52
INCOME STATEMENT
A partnership’s income statement is prepared in the same
way as that for any business. The division of net income
may or may not be shown on the income statement.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 53
STATEMENT OF PARTNER’S EQUITY
This reports the change in partners’ capital account resulting from
business operations, investments, and withdrawals. It is similar to the
statement of owner’s equity for a sole proprietorship.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 54
BALANCE SHEET

The owners’ equity

section of the
balance sheet is
called the
Partners’ Equity
section.

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 55
 Illustrative Example
Dr. Nick Marasigan

PAMANTASAN NG LUNGSOD NG VALENZUELA

COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 56
PAMANTASAN NG LUNGSOD NG VALENZUELA
COLLEGE OF BUSINESS AND ACCOUNTANCY
Overview of the Accounting Cycle 57