REVIEW ON FINANCIAL STATEMENT PREPARATION, ANALYSIS AND

INTERPRETATION

The Accounting Cycle

Because accounting is all about getting data and putting them into the accounting
equation, the end products are financial statements such as a balance sheet and income
statements, the process of accounting follows a cycle called the Accounting Cycle. It starts
with the identification of whether a transaction is accountable or can be quantified, and ends
with a post-closing trial balance. The following steps should be followed:
1. Analyze business transactions.
2. Record this transaction in the journal.
3. Post the transactions on a ledger.
4. Prepare an unadjusted trial balance.
5. Make adjustments. Journalize adjustment entries.
6. Prepare an adjusted trial balance.
7. Prepare the financial statements.
8. Make the closing entries.
9. Make a post – closing trial balance.

Basic Financial Statements

1. Income Statement
These are also known as the Profit/Loss Statement, Statement of Comprehensive
Income, or Statement of Income. This is a summary of the revenue and expenses of a
business entity for a specific period of time, such as a month or a year.
2. Statement of Owner’s Equity
These are also known as the Statement of Changes in Equity. This reports the
changes in the owner’s equity over a period of time. It is prepared after the income
statement because the net income or net loss for the period must be reported in this
statement. Similarly, it is prepared before the balance sheet since the amount of owner’s
equity at the end of the period must be reported on the balance sheet. Because of this, the
statement of owner’s equity is often viewed as the connecting link between the income
statement and balance sheet.
3. Balance Sheet
Formerly known as the Statement of Financial Position. This provides information
regarding the liquidity position and capital structure of a company as of a given date. It must
be noted that the information found in this report are only true as of a given date. It shows a
list of the assets, liabilities, and owner’s equity of a business entity as of a specific date,
usually at the close of the last day of a month or a year.
4. Statement of Cash Flows
The statement of cash flows reports a company’s cash inflows and outflows for a
period. This is used by managers in evaluating past operations and in planning future
investing and financing activities. It is also used by external users such as investors and
creditors to assess a company’s profit potential and ability to pay its debt and pay dividends.
Books of Accounts

A. JOURNALS
A journal is a chronological record of all the company’s transactions listed by date. It
is often referred to as the book of original entry. This is because we first record the business
transaction in this book. The recording of financial information into the journal is known as
the process of journalizing. There are two kinds of journals:
I. General Journal
Most businesses, especially large companies, may adopt different kinds of journals
but all business organizations use the most basic type of journal which is the general journal.
The general journal typically displays the transaction’s date, account titles and explanations,
references, and respective amounts of corresponding accounts. A sample format is shown
below:

Date Account Titles and Explanations Ref. Debit Credit

(1) (2) (3) (4) (5)

(1) Date. The date at which the transaction occurred.

(2) Account Titles and Explanations. The account to be debited and the account to be
credited is recorded. Correct and proper use of the account titles are necessary for a clear
and accurate presentation of amounts in the financial statements. Also a brief explanation of
the business transaction is described.
(3) Reference. Reference number of each account journalized. The Ref column is left blank
during the journalizing process and is filled out during the posting process.
(4) Debit. Corresponding amount of the account debited is entered.
(5) Credit. Corresponding amount of the account credited is entered.

II. Special Journals

Special Journal Purpose

Sales journal Used in journalizing all sales of merchandise on account.

Cash receipts journal Used in journalizing all cash received (including cash sales)

Purchases journal Used in journalizing all purchases of merchandise on account

Cash payments Used in journalizing all cash paid (including cash purchases)
journal
A. Sales Journal
(2) S1

SALES JOURNAL

(1)

Date Account Debited Invoice Ref. Dr. Accounts Receivable

No.
Cr. Sales
(5)
(3) (4) (6) (7)

TOTAL

(8)

(1) Special Journal Title. The name of the special journal – Sales Journal.
(2) Special Journal Reference Number. Reference number of the special journal that is used
during posting to the ledgers.
(3) Date. The date at which the transaction occurred.
(4) Account Debited. Each of the company’s individual customers is shown. This will be
helpful during the posting process to the subsidiary ledgers.
(5) Invoice Number. Pre-numbered invoices ensured that all invoices transactions are
journalized.
(6) Reference. A check mark is inputted under this column when postings are made in the
ledger. This is to ensure all transactions are posted and, and at the same time, to prevent
double postings.
(7) Dr. Accounts Receivable, Cr. Sales. Since all transactions in each special journal are of
the same type, explanations of transactions in each journal entry are eliminated. In the
sample format above, it is shown that all transactions inputted in the sales journal include a
debit (Dr) to accounts receivable and a credit (Cr) to sales. Under this column, the respective
amounts of each transaction are entered.
(8) Total. At the end of each month, the total is computed. This will then be posted to the
general ledger rather than the individual entries. This saves time and, at the same time,
reduces the possibilities of errors in posting.
B. Cash Receipts Journal
(2) CR1

CASH RECEIPTS JOURNAL

(1)

Date Account Ref. Dr. Cash Cr. Cr. Sales Cr. Other
Credited Accounts Accounts
Receivable

(7)
(4) (7)
(3) (5) (6) (7)

TOTAL TOTAL TOTAL TOTAL

(8) (8) (8) (8)

(1) Special Journal Title. The name of the special journal – Sales Journal.
(2) Special Journal Reference Number. Reference number of the special journal that is used
during posting to the ledgers.
(3) Date. The date at which the transaction occurred.
(4) Account credited. The account that is credited with reference to the chart of accounts.
(5) Reference. It is left blank upon journalizing and is filled out during the posting process. A
check mark is inputted under this column when postings are made in the ledger.
(6) Debit (Dr) Cash. The corresponding amount of cash debited is entered.
(7) Credit (Cr) Accounts Receivable, Sales, Other Accounts. The respective amount credited
are entered.
(8) Totals. These will be posted to the general ledger rather than individual entries.
C. Purchases Journal
(2) P1

PURCHASES JOURNAL

(1)

Date Account Credited Terms Ref. Dr. Inventory

Cr. Accounts Payable

(3) (4) (5) (6) (7)

TOTAL

(8)

(1) Special Journal Title. The name of the special journal – Purchases Journal.
(2) Special Journal Reference Number. Reference number of the special journal that is used
during posting to the ledgers.
(3) Date. The date at which the transaction occurred.
(4) Account Credited. The company’s individual suppiers are shown. This will be helpful
during the posting process to the subsidiary ledgers.
(5) Terms. Suppliers usually provide discounts on its regular customers. The payment terms
include the discount rate, discount period, and payment period. For example: 2/10, n/30
indicates a 2% discount if paid within 10 days; otherwise, the payment should be made
within 30 days.
(6) Reference. It is left blank upon journalizing and is filled out with a check during the
posting process to ensure all transactions are posted and to eliminate double postings to the
ledger.
(7) Dr. Inventory, Cr. Accounts Payable. The purchases journal contains all purchases on
account. All transactions inputted in thi journal include a debit to inventory and a credit to
accounts payable. Under this column, the respective amounts of each transaction are
entered.
(8) Total. At the end of each month, the total is computed. This will then be posted to the
general ledger rather than the individual entries. This saves time and, at the same time,
reduces the possibilities of errors in posting.
D. Cash Payments Journal
(2) CP1

CASH PAYMENTS JOURNAL

(1)

Date Check No. Account Ref. Dr. Dr. Other Cr. Cash
Debited Accounts Accounts
Payable

(7)
(5) (7)
(3) (4) (6) (8)

TOTAL TOTAL TOTAL

(9) (9) (9)

(1) Special Journal Title. The name of the special journal – Cash Payments Journal.
(2) Special Journal Reference Number. Reference number of the special journal that is used
during posting to the ledgers.
(3) Date. The date at which the transaction occurred.
(4) Check No. The corresponding check number of each cash payment are recorded to
maintain a record of the disbursed checks.
(5) Account Debited. The account that is debited.
(6) Reference. It is left blank upon journalizing and is filled out with a check during the
posting process to ensure all transactions are posted and to eliminate double postings to the
ledger.
(7) Dr. Accounts Payable, Other Accounts. The respective amount debited is entered.
(8) Cr. Cash. The corresponding amount of cash credited is entered.
(9) Totals. These will be posted to the general ledger rather than individual entries.

B. LEDGERS
After journalizing the business transactions in the general journal and special
journals, the company will now proceed to the process of posting. Posting involves the
transferring of journal entries to the ledger accounts to bring together the effects of
transactions to the individual accounts of the company.

The ledger is tje grouping of all accounts of a company showing its respective
outstanding balances. It is also called the book of final entry of accounting transactions. It
presents the changes in specific account balances. All account balances presented in the
financial reports of the company are derived from the ledger. The two kinds of ledger are the
general ledger and the subsidiary ledger.

I. General Ledger
The general ledger contains all the asset, liability, and owner’s equity accounts of the
company. The ledgers are usually grouped according to their chart of accounts and arranged
according on how they appear on the financial statements starting from the asset accounts,
followed by the liability accounts, and finally, the equity accounts including the revenues and
expenses accounts. Each account is numbered based on the chart of accounts for easier
and faster reference. The general ledger shows the amount outstanding on each of the
company’s accounts as of certain date.

II. Subsidiary Ledger

Large companies have thousands of transactions from their hundreds of customers,
who buy goods and merchandise on credit. To ease their burden, large companies use
subsidiary ledgers. A subsidiary ledger is a group of accounts with similar characteristics. It
is an additional record to the general ledger utilized by the company to track the per-
individual accounts of the company’s customers, creditors, and the like.

Sample:
(2) No. 101

CASH

(1)

Date Explanation Ref. Debit Credit Balance

(3) (4) (5) (6) (7) (8)

(1) Account Title. Each account is labeled with its corresponding account title.
(2) Ledger Account Reference No. With reference to the company’s chart of accounts, each
of the account titles corresponds to a reference number. In the above example, the cash
account is assigned a refernce number 101.
(3) Date. The date of the transaction is also entered in reference to the journal.
(4) Explanation. A brief description of the business transaction is defined. This is sometimes
omitted since the entries on the journal already provide an explanation of the transaction.
(5) Reference. This column displays the journal page number from which the transaction
was posted.
(6) Debit. Amounts debited to the account are inputted.
(7) Credit. Apounts credited to the account are entered.
(8) Balance. What distimguished a ledger from the journal is the running outstanding
balances provided by the ledger. After every transaction, the balances of each of the
accounts are known without the need for further computations. On year end, these balances
will be the basis of the amounts presented in the financial statements of the company.
Vertical Analysis / Common – size Financial Statement Analysis

ABM Store
Statement of Financial Position
For the Year Ended December 31
2021 % 2020 %

Cash 470,310 519,860

Accounts Receivable 660,110 565,170

Inventory 653,060 555,480

Prepaid expenses 173,740 228,810

Property, plant & equipment 5,910,530 5,501,660

Intangible assets 745,200 721,910

Total Assets 8,612,950 8,092,890

Current liabilities 1,273,050 1,123,700

Long-term liabilities 577,580 541,540

ABM, Capital 6,762,320 6,427,650

Total liabilities & equity 8,612,950 8,092,890

ABM Store
Statement of Comprehensive Income
For the Year Ended December 31

2021 % 2020 %

Sales 5,385,860 4,921,850

Less: Cost of goods sold 1,374,790 1,254,860

Gross Profit 4,011,070 3,666,990

Less: Selling & administrative 3,406,460 3,127,150

expenses

Operating income 604,610 539,840

Less: Interest expense 11,820 23,040

Net Income 592,790 516,800

Horizontal Analysis / Trend Analysis

ABM Store
Statement of Financial Position
For the Year Ended December 31
Increase (Decrease

2021 2020 P %

Cash 470,310 519,860

Accounts Receivable 660,110 565,170

Inventory 653,060 555,480

Prepaid expenses 173,740 228,810

Property, plant & equipment 5,910,530 5,501,660

Intangible assets 745,200 721,910

Total Assets 8,612,950 8,092,890

Current liabilities 1,273,050 1,123,700

Long-term liabilities 577,580 541,540

ABM, Capital 6,762,320 6,427,650

Total liabilities & equity 8,612,950 8,092,890

ABM Store
Statement of Comprehensive Income
For the Year Ended December 31
Increase (Decrease

2021 2020 P %

Sales 5,385,860 4,921,850

Less: Cost of goods sold 1,374,790 1,254,860

Gross Profit 4,011,070 3,666,990

Less: Selling & administrative 3,406,460 3,127,150

expenses

Operating income 604,610 539,840

Less: Interest expense 11,820 23,040

Net Income 592,790 516,800