Steps in the Accounting cycle

1. Identifying and analyzing

2. Journalizing

3. Posting

4. Unadjusted trial balance

5. Adjusting entries

6. Adjusted trial balance (and/or Worksheet)

7. Financial statements

8. Closing entries

9. Post-closing trial balance

10. Reversing entries

Identifying and analyzing

transactions and events

• Only accountable events are recorded. Accountable events are those that affect the assets, liabilities,
equity, income or expenses of the business.

• Accountable events are normally identified from source documents, such as sales invoice, official
receipts, delivery receipts, and the like.

Types of Events

1. External events – are transactions that involve the business and another external party.

2. Internal events – are events that do not involve an external party.

Journalizing

Journalizing refers to recording an identified accountable event in the journal by means of a journal
entry.

Simple and Compound journal entries

• Simple journal entry – contains a single debit and a single credit element.

• Compound journal entry – contains two or more debits or credits.

Chapter 7

Posting to the Ledger Learning Objectives

1. Post transactions in the ledger.

2. Prepare the unadjusted trial balance.

Posting

Posting, the third step in the accounting cycle, is the process of transferring data from the journal to the
appropriate accounts in the ledger.

Example of posting:

Transaction: Jan. 8 - Services worth ₱30,000 were rendered for cash.

Trial balance

• A trial balance is a list of general ledger accounts and their balances. It is prepared to check the
equality of total debits and total credits in the ledger.

Types of Trial balance

a. Unadjusted trial balance – this is prepared before adjusting entries are made.

b. Adjusted trial balance – this is prepared after adjusting entries but before the financial statements are
prepared.

c. Post-closing trial balance – this is prepared after the closing process.

Errors revealed by a trial balance

1. Journalizing or posting one-half of an entry, i.e., a debit without a credit, or vice versa.

2. Recording one part of an entry for a different amount than the other part.

3. Errors of Transplacement (Slide error) on one side of an entry.

4. Error of Transposition on one side of an entry.

Errors not revealed by a trial

balance

1. Omitting entirely the entry for a transaction

2. Journalizing or posting an entry twice

3. Using wrong account with the same normal balance as the correct account

4. Wrong computation with the same erroneous amounts posted to debit and credit sides

Chapter 8Adjusting Entries

Learning Objectives

1. Enumerate the common end-of-period adjustments.

2. Prepare adjusting entries.

Adjusting entries

• Adjusting entries are entries made prior to the preparation of financial statements to update certain
accounts so that they reflect correct balances as of the designated time.

Purpose of adjusting entries

a. To take up unrecorded income and expense of the period.

b. To split mixed accounts into their real and nominal elements.

Real, Nominal and Mixed Accounts

a. Real Accounts (Permanent accounts) – accounts that are not closed at the end of the accounting
period. These accounts include all balance sheet accounts, except the “Owner’s drawings” account.

b. Nominal Accounts (Temporary accounts) – accounts that are closed at the end of the accounting
period. These accounts include all income statement accounts, drawings account, clearing accounts and
suspense accounts.

c. Mixed accounts – accounts that have both real and nominal account components. These accounts are
subject to adjustment.

Methods of Initial Recording of

Income

1. Liability method – under this method, cash receipts from items of income are initially credited to a

liability account. At the end of the period, the earned portion is recognized as income while the
unearned portion remains as liability.
2. Income method – under this method cash receipts from items of income are initially credited to an

income account. At the end of the period, the unearned portion is recognized as liability while the

earned portion remains as income.

Methods of Initial Recording of

Expenses

1. Asset method – under this method cash disbursements for items of expenses are initially debited to
an asset account. At the end of the period, the incurred portion (‘used up’ or ‘expired’) is recognized as
expense while the unused portion remains as asset.

2. Expense method – under this method, cash disbursements for items of expenses are initially debited
to an expense account. At the end of the period, the unused portion (‘not yet incurred’ or ‘unexpired’) is
recognized as asset while the incurred portion remains as expense.

Accounting Cycle of a Service Business

Learning Objectives

1. Prepare a worksheet.

2. Prepare closing entries.

3. Prepare a balance sheet and income

statement of a service business.

4. Prepare reversing entries.

Worksheet

A worksheet is an analytical device used to facilitate the gathering of data for adjustments, the
preparation of financial statements, and closing entries.

Financial statements

• The financial statements are the end product of the accounting process. Information from the journal
and the ledger are meaningless to most users unless they are summarized and communicated

through the financial statements.

Financial Statements

• Statement of financial position (or Balance

sheet) – shows information on assets,

liabilities and equity.

• Statement of profit or loss (or Income

statement) – shows information on income

and expenses, and consequently, the profit

or loss for the period.

Closing entries

• Closing entries are entries prepared at the

end of the accounting period to “zero out”

all nominal accounts in the ledger. This is

done so that the transactions during the

period will not commingle with the

transactions in the next period.

Closing entries

• Closing entries are prepared as follows:

a. All income accounts are debited and all

expense accounts are credited. The resulting

balance is recorded in a clearing account

called the “Income summary.”

b. The balance of “Income summary” is closed to

the “Owner’s capital” account.

c. Any balance in the “Owner’s drawings”

account is closed to the “Owner’s capital”

account.
Reversing Entries

• Reversing entries are entries usually made

on the first day of the next accounting

period to reverse certain adjusting entries

made in the immediately preceding period.

Adjusting entries that may be

reversed

1. Accruals for income or expense

2. Prepayments initially recorded using the

expense method

3. Advanced collections initially recorded

using the income method

Chapter 10
Accounting Cycle of a Merchandising
Business

Learning Objectives
1. Prepare the Statement of Cost of Goods Sold
and Gross Profit.
2. Complete the accounting cycle of a
merchandising business

Merchandising Business
• A merchandising business is one that buys
and sells goods, in their original form and
without any further processing. Those goods
are referred to as merchandise inventory
(or simply, inventory).

Inventory Systems
a. Perpetual inventory system – under this
system, the “Inventory” account is updated
each time a purchase or sale is made. Thus,
the “Inventory” account shows a continuing or
running balance of the goods on hand.
b. Periodic inventory system – under this system,
the “Inventory” account is updated only when
a physical count is performed. Thus, the
amounts of inventory and cost of goods sold
are determined only periodically.

Accounts used under Periodic

System
• Purchases – the account used to record purchases of
inventory under the periodic system.
• Freight-in (Transportation-in) – the account used to
record the shipping costs incurred on purchases of
inventory under the periodic system.
• Purchase returns – the account used to record
returns of purchased goods to the supplier.
• Purchase discounts – the account used to record
cash discounts availed of on the purchased goods.
Chapter 10: Accounting Cycle of a Merchandising Business (FAR by:
Millan)
Gross Profit

• Sales – include both cash sales and credit

sales.
• Sales returns – the account used to goods
sold but were returned by customers.
• Sales discounts – the account used to record
cash discounts given to and taken by
customers.
Chapter 10: Accounting Cycle of a Merchandising Business (FAR by:
Millan)
Statement of Cost of Goods Sold
and Gross Profit