FINANCIAL

ACCOUNTING
(FINACC1)
SY 2022-23-1

Lecture 7 10/21/22
(Acc. Cycle)

Teacher: Rogelio C. Conel ,Jr., CPA MBA

The Accounting
Cycle
 THE ACCOUNTING CYCLE

WORK SHEET
> TRIAL BALANCE
> ADJUSTMENT
BUSINESS > ADJUSTED TRIAL BALANCE CLOSING
DOCUMENTS ENTRIES

JOURNALS POST CLOSING

TRIAL BALANCE

FORMAL FINANCIAL
STATEMENTS
LEDGERS > BALANCE SHEET
> INCOME STATEMENT REVERSING
> SCFP ENTRIES
> NOTES TO THE F/S
The Accounting
Cycle
Step1. Identification and analysis of the accounting
transaction: a) with monetary signifance and b) with
valid supporting documents (ex. Sales invoice,
expense bills, contract document, etc)
The Accounting Cycle
Step2. Journalize/ record the transaction in
the books of original entry

Journal data include:

1. date of the transaction,
2. amount,
3. affected accounts with account
number, and
4. description.
5. may also include a reference number,
such as a check number
The Accounting
Cycle
The Accounting
Cycle
Example of GJ and Ledgers
The Accounting Cycle
 The Unadjusted Trial Balance
(UTB)
Step 4

The equality of debits and credits in the ledger

should be proven at the end of each
accounting period by preparing a trial balance.

Post the account running balance of each

General Ledger account into the UTB. It is
adjusted because the period Adjusting journal
entries are still missing in this stage.
Sample1 UTB
Sample2 UTB
If the totals of debit and credit columns
of trial balance are the same, it is
presumed that the accounting process is
accurate.

However, there maybe errors in the

accounting process that cannot be
detected by the trial balance sheet.
TYPES OF NON-MATHEMATICAL
ERRORS EXISTING IN THE T/B
 1. Transposition

A transposition occurs when the

order of the digits is changed by
mistake, such as writing P542 as
P452 or P524.
 2. Slide

In a slide, the entire number is moved one or

more spaces to the right or the left by
mistake, such as writing P542.00 as P54.20
or P97.50 as P975.00.
 3. Misposting
o Another type of error is a posting error.
o Assume that on May 5 a P12,500 purchase of
office equipment on account was incorrectly
journalized and posted as a debit to Supplies
and a credit to Accounts Payable for P12,500.
o The entry to correct the error is:
4. Entries Posted Twice and
Posting two times the same JE, leaves the TB in
error but in balance.

Example: a payment for home internet is entered

twice by mistake.

5. Entry Reversal Twice

Reversing accounting entries means that an entry
is credited instead of being debited, or vice versa.

The issue is that you can’t spot these mistakes in

the trial balance—it will still be in balance
regardless.
6. Error of Omission

This happens when a financial transaction

isn’t recorded and so isn’t part of the
documentation. Usually the transaction,
which could be an expense or sale of a
service, is overlooked or forgotten.

Example: an accountant misplaced a sales

invoice worth P10,000 so it is not included
in the closing for the period.
7. Error of Commission
When an amount is entered as the right
amount and the right account but the
value is wrong, this is an error of
commission. This can mean that perhaps
a sum is subtracted instead of added.

Example: a payment is applied to the

wrong invoice. The amount owed by the
client will be right in the trial balance. But,
the client’s subledger (or entry details) will
be off.
8. Error of Principle

This is a transaction that doesn’t meet the

generally accepted accounting principles
(GAAP). It’s also called an “input error”
because, though the number is correct, it’s
recorded in the wrong account.

Example: inventory is expensed which

causes it to be recorded as a nominal
accounts , instead of to asset account (real
account)
The Accounting
Cycle
Step 5 Preparation of the Adjusting Journal
Entries.
It ensures the proper matching of costs to
revenues and that revenues and liabilities
represents true amounts earned or incurred in
the accounting period.

Adjusting journal entries are used to record

transactions that have occurred but have not yet
been appropriately recorded in accordance with
the accrual method of accounting.
Adjusting journal entries are recorded in a
company's general ledger at the end of an
accounting period to abide by the
matching and revenue recognition
principles.
The types of adjusting journal entries are:
1. accruals,
2. deferrals,
3. estimates
1) ACCRUED REVENUE (CURRENT
ASSETS)
Accrued revenue is booked when there is a
mismatch between the time of payment and
delivery of related goods/services. This can
happen in cases of credit sales, long term
projects, milestones met in large orders.

JE: Dr. Accounts Receivable xxx

Cr. Sales xxx
Example of Accrued revenue
2) ACCRUED EXPENSE (LIABILITIES)
Accrued expenses are expenses that are already incurred
but not yet paid. Utilities expenses (power and water) is a
good example as expense bills are usually received in the
next month power supplier is usually delivered the
following month is a common accrued expense. JE (Dr
Expense/ Cr Accrued Expense)
3) DEFERRED EXPENSE (ASSETS-PREPAID
EXPENSES)
Prepaid expenses are assets that are paid for and
that are gradually used up during the accounting
period. Common examples of deferred expenses
are prepaid office supplies; prepaid insurance,
prepaid rent.

During the accounting period, the prepayments are

used up and become an expense.

JE: Dr Expense
Cr Prepaid Assets
EXAMPLE OF A DEFERRED EXPENSE (ASSETS-
PREPAID EXPENSES)
4) DEFERRED REVENUE (Liabilities),
Also called unearned revenue, refers to advance
payments received for products or services that are to
be delivered or performed in the future.
JE: Dr Cash
Cr Deferred (unearned) revenue.