REVIEW OF THE ACCOUNTING PROCESS

(Double-entry System of Bookkeeping)

1. BROAD STEPS OF OPERATION IN THE FINANCIAL ACCOUNTING PROCESS UNDER DOUBLE-ENTRY

SYSTEM OF BOOKKEEPING 

These are the series of steps undertaken in one accounting period to identify, record, store and
report accounting information contained in accountable events. 

1. Selecting the event (or Identification of accountable events) - An event or transaction is selected
for recording if it complies with the criteria for accountable events set under double-entry
principles.
2. Analyzing the events - events are analyzed to determine their effects on the financial position of
the enterprise.
3. Measuring the effects - effects of the events on the financial position of the enterprise are
measured and represented by money amounts.
4. Classifying the measured effects - the effects are classified according to the individual assets and
liabilities, owners' equity items, revenue and expenses affected.
5. Recording the measured effects - the effects are recorded according to the asset, liability, equity,
revenue and expense items affected (Journalizing and posting).
6. Summarizing the recorded effects - the amount of changes for each asset, liability, equity item,
revenue and expenses are summed and related data are grouped (Trial balance preparation).
7. Adjusting the records - re-measurements, new data, corrections or other adjustments are often
required after the events have been initially recorded, classified, and summarized of financial
statements (Preparation of adjusting entries including worksheet preparation).
8. Communicating the processed information - the information is communicated to users in the
form (Preparation of Financial Statements).

2. THE 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.

2.1 Parts of the Financial Accounting Process:

I. Recording Phase - includes identifying and analyzing transactions, journalizing and
posting.
II. Summarizing Phase - includes the preparation of unadjusted trial balance adjusting
entries, financial statements, closing entries, post-closing trial balance and reversing
entries. 
2.2 Steps in the Accounting Cycle 
1. Identifying and Analyzing transactions and events to be recorded - Gathering of
information from source documents and determining the impact of the transaction or
event on the financial position using the equation “Assets equals Liabilities + Owners'
equity"
2. Journalizing the transactions and events - Act of recording transactions in the business
forms to appropriate journals.
3. Posting - act of transferring peso amounts and other information from the journal to the
ledger.
4. Preparing the unadjusted trial balance - balance of the general ledger accounts are proved
as to the equality of debits and credits and to serve as a basis for adjusting entries.
5. Journalizing and posting the adjusting entries - to take up accruals, expiration of deferrals,
estimations and other events often not signaled by new source documents 
6. Preparing the adjusted trial balance (or preparing the worksheet) - Checking the equality
of debits and credits after adjustments and to facilitate the preparation of financial
statements. 
7. Preparing the financial statements - the means by which the processed information is
communicated to external decision-makers 
8. Closing the books - involves journalizing and posting closing entries and ruling and
balancing real accounts in the ledger. Temporary capital accounts (or nominal accounts)
are closed and the resulting net income or loss is transferred to the capital account or
retained earnings account.
9. Taking a post-closing trial balance - this is done to prove equality of debits and credits in
the ledger after the closing process.
10. Preparing, entering and posting of reversing entries - this is done to facilitate the recording
of certain transactions in the succeeding accounting period. 

2.3 Accounting Records of a Business Enterprise 

1. Business or source documents - these are the original source materials evidencing a
transaction. Examples are purchase invoice, official receipts, vouchers, debit or credit
memoranda, miscellaneous bills for expenses. 
2. Books of original entry - these refer to the journals such as the General Journal and the
special journals (sales journal, purchase journal, cash receipts journal, cash disbursement
journal, or voucher register and check register 
3. Books of final entry - these refer to the Ledgers: General Ledger and subsidiary ledgers 

3. IDENTIFYING AND ANALYZING TRANSACTIONS AND EVENTS - the process of selecting a

transaction or event and analyzing its impact on the financial position.
1. The "dual effects principle” of the double-entry system of bookkeeping is used. Each
recorded event affects at least two items in the financial accounting records
 2. The account is used as the storage unit of information in double-entry system. It is
composed of three parts, the name of the account, (or account title), the left side (or debit)
the right side (or credit) 
4. JOURNALIZING - the process of recording transactions by means of a journal entry in the
journal.
1. Types of journal entries as to the time prepared: 
a) Opening entry - entry beginning a new system of accounting for enterprises.
b) Current entries - entries to record transactions completed by the business during a given
period.
c) 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.
d) 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.
e) Reversing entries - entries made at the start of the subsequent accounting period to
reverse certain adjusting entries made in the immediately preceding accounting period
f) Correcting entries - entries made to correct entries made in error.
g) Reclassification entries - entries that transfer an item from one account to another that
may clearly describe the nature of the item transferred. 

2. JOURNAL - a formal record or book of original entry where transactions are recorded for
the first time. 

3. Types of Journals: 
a) Simple journal - a book of original entry used to record all transactions 
1. General journal - simple journal with two money columns 
2. Combination journal - simple journal with several money columns
b) Special journal - multi-column book to record transactions of a similar nature. 

Types of Special Journals:

a. Cash receipts journal
b. Cash disbursement journal
c. Sales Journal
d. Purchase Journal 
e. Voucher Register
f. Check Register
g. Requisition journal
h. Finished goods journal
i. Factory journal 

4. VOUCHER SYSTEM - a special method of accounting for business transactions which involves

the payment of cash immediately or in the future. It is one of the means of establishing
internal control over the expenditures of the business.
 A voucher is a document that carries the authorization to pay cash either immediately or in
a future date, and to journalize the transaction. Thus, one of the most important parts of a
voucher is the signature(s) of the authorizing officials of the economic entity.

Two basic principles in voucher system: 

1. All cash payments either immediately or in the future, must be properly authorized
through a voucher.
2. No voucher can be presented for payment twice.

5. Books of Accounts Used: 

a) Voucher register - records vouchers issued
b) Check register - records all sales of merchandise
c) Sales register - records all sales of merchandise
d) Cash receipts journal - records all receipts of cash
e) General journal - records transactions not accommodated in special journal 

6. Procedures for the Voucher System:

a) Preparing the voucher
b) Approval of voucher (control measure)
c) Recording the voucher 
d) Filing the unpaid voucher
e) Filing the paid voucher 

7. Advantages of the Voucher System: 

a) Better control over disbursements
b) Facility in taking cash discount
c) Elimination of account payable subsidiary ledger 

8. Disadvantages of Voucher system 

a) Lacks flexibility 
b) May result in duplication of work and increased bookkeeping expenses.

5. POSTING - it is the process of transferring data from the journal to the appropriate  accounts in
the ledger.
I. Purpose: it serves to classify the effects of transactions on specific asset,
liability proprietorship, revenue and expense accounts. 
II. LEDGER - systematic compilation of a group of accounts
III. Kinds of Ledger 
a. general ledger - contains all accounts appearing in the financial statements.
b. private ledger - contains confidential information of accounts.
c. subsidiary ledger - a 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. 
 IV. Accounts - are accounting devices used to summarize change in asset, liability  or
proprietorship.
V. Kinds of accounts 
a. Real account 
b. Nominal account
c. Mixed account
d. Clearing account
e. Controlling account
f. Suspense account
g. Reciprocal account
h. Auxiliary account
i. Summary account

6. PREPARING THE TRIAL BALANCE - this is the third step of the bookkeeping cycle which is the
listing down of accounts with open balances in order to prove the mathematical accuracy of the
debits and credits in the ledger.
1. TYPES OF TRIAL BALANCE;
A. As to Form:
1. Trial Balance of Balances - contains accounts with open balances only
2. Trial Balance of Totals - contains all accounts in the ledger, both open and
closed 
B. As to time of preparation 
1. Periodic or Unadjusted Trial Balance - this is prepared before the preparation of
adjusting entries. 
Contents: Real, Nominal and Mixed accounts
2. Adjusted Trial Balance - one prepared after adjusting entries. 
Contents: Real and Nominal accounts.
3. Post-closing Trial Balance - one prepared after the closing process.
Contents: Real accounts only. 

2. Examples of ERRORS REVEALED BY A TRIAL BALANCE: 

1. Error of Transplacement
2. Error of Transposition
3. Error in posting one side of an entry
4. Omission in posting one side of an entry

3. Examples of ERRORS NOT REVEALED BY A TRIAL BALANCE: 

1. Wrong computation
2. Wrong classification of account (wrong account used)
3. Double-posting both sides of an entry
4. Omission in posting both sides of an entry
5. Omission in journalizing a transaction.
7. PREPARATION OF ADJUSTING ENTRIES - These are entries made at the accounting period to
update or bring to their correct balances certain asset, liability, revenue or expense accounts.
1. CONCEPTS INVOLVED; 
1.1 ACCRUAL - Revenue smut be recognized when earned, even if cash is not yet received.
Expenses must be recorded when benefits are received, even if cash is not yet paid.
1.2 MATCHING OF COSTS AGAINST REVENUE 
To have a fair measurement of revenue in a given period of time, all costs and expenses
incurred in generating that revenue must be deducted therefrom.
1.3 ACCOUNTING PERIOD
A transaction is recorded on the basis of business papers. Certain transactions, however,
remain "unfinished" at the time of reporting financial information. Estimates and
updating entries therefore become necessary in order to reflect more fairly the status of
certain accounts. 

2. PURPOSE OF ADJUSTING ENTRIES; 

1. To take up unrecorded income and expenses of the period 
a. accrued expense
b. accrued income 
2. To split mixed accounts into their real and nominal elements:
a. Prepaid expenses
b. Unearned or pre-collected income
c. Bad Debts
d. Inventory
e. Depreciation 

8. PREPARING ADJUSTED TRIAL BALANCE OR A WORKSHEET 

1. Definition: A worksheet is an analytical device used in accounting to facilitate the gathering
of data for adjustment, the preparation of financial statements, and closing entries 

9. PREPARING FINANCIAL STATEMENTS 

1. Definition: Financial statements are the means by which the information accumulated and
processed in financial accounting is periodically communicated to the users.
2. Components of the Basic Financial Statements: (details to be discussed in  PAS I --
Presentation of Financial Statements)
a. Statement of Financial Position (Balance Sheet) - a formal statement showing assets,
liabilities, capital or the financial position of an enterprise as of a given date. 
b. Statement of Comprehensive Income - presents the revenue, expenses, gains, losses,
both realized and unrealized, that are the result of the enterprise's profit-directed
activities during a given period of time.
c. Statement of Changes in Equity - shows the movements in the elements of the
components of stockholders' equity which includes the net income and items such as
dividends, appropriations and adjustments of net income of prior periods. 
 d. Statement of 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 - 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 in making economic decisions 

10. CLOSING THE BOOKS 

1. Definition: 
Closing the books is the process of preparing closing entries and ruling and balancing real
accounts
Closing entries - are entries prepared at the end of the accounting period to "empty' or
bring to zero all nominal accounts in the ledger. 

2. Steps in preparing closing entries:

a. Close all nominal accounts to income and expense summary account.
b. Close Income and Expense Summary account to Drawing (in case of
single proprietorship or partnership), or to Retained Earnings (if corporation)
c. Close Drawing to Capital 

11. PREPARING THE POST-CLOSING TRIAL BALANCE 

1. Definition: A post-closing trial balance is a trial balance prepared after closing the books.
2. Purpose: To prove the equality of the debits and credits in the ledger after  the closing
process.
3. Contents: Real accounts only 

12. REVERSING ENTRIES 

1. Definition: Reversing entries are entries made on the first day of the succeeding accounting
period to reverse certain adjusting entries done in an immediately preceding period.
2. Purpose:
a. For convenience in recording accruals 
b. For consistency in recording deferrals 
3. Adjustments requiring reversal: 
a. Accrued expense
b. Prepaid expense, expense method
c. Unearned income, income method