01 Review of the

Accounting Cycle
Mark Antony A. Rosales, CPA
MIT/ABM Department, CED-IDS
 Nature of a service enterprise

Review of the Accounting Cycle

 Nature of a service enterprise

• A service business provides a needed service for a fee.

• In general, service businesses actually have no physical

product sold to clients.

• Their services are designed to facilitate the work of clients

and in return are paid.

Review of the Accounting Cycle

 Accounting cycle

Review of the Accounting Cycle

 Accounting cycle

Review of the Accounting Cycle

 Accounting cycle

1. Identification and measurement of external transactions

and internal events. (Ex. Receipt of payment from a client;
payment of an electric bill)

Review of the Accounting Cycle

 Accounting cycle

2. Preparation of journal entries (through the use of special

journals and the general journal)

Review of the Accounting Cycle

 Rules on debit and credit

ASSET LIABILITY EQUITY

DEBIT + - -
CREDIT - + +

Review of the Accounting Cycle

 Accounting cycle

3. Posting
• Special journals – summary or totals
• General journal – individual transactions

Review of the Accounting Cycle

 Accounting cycle

4. Unadjusted trial balance

Review of the Accounting Cycle

 Accounting cycle

5. Worksheet – plotting the items in the unadjusted trial

balance to a worksheet

Review of the Accounting Cycle

 Accounting cycle

6. Adjusting entries – are journal entries that bring the

accounts up to date. One purpose is for income and expenses
to be reported in the correct period.

Review of the Accounting Cycle

 Revenue recognition

• Accounting standards require that revenue is recognized

when it is earned, regardless of when payment is received.

Review of the Accounting Cycle

 Matching principle

• Expenses must be reported within the same period the

related income is recognized.

Review of the Accounting Cycle

 5 basic sources of adjusting entries

1. Depreciation
2. Deferred expenses or prepaid expenses
3. Deferred income or unearned income
4. Accrued expenses or accrued liabilities
5. Accrued income or accrued assets

Review of the Accounting Cycle

 Accounting cycle

7. Preparation of the financial statements

Review of the Accounting Cycle

 Accounting cycle

8. Journalizing and posting closing entries

Review of the Accounting Cycle

 Nominal vs real accounts

• Closing the books involves transferring the balances of

nominal/temporary accounts to the owner’s capital
account.

• Nominal or temporary accounts – accumulates the

transactions of one accounting period

• Real or permanent accounts – their balances continue to

accumulate beyond the current accounting period
Review of the Accounting Cycle