Accounting Cycle

ACCOUNTING CYCLE DURING THE ACCOUNTING PERIOD

STEP 1: IDENTIFICATION OF STEP 2: TRANSACTIONS ARE STEP 3: JOURNAL ENTRIES ARE
EVENTS TO BE RECORDED RECORDED IN THE JOURNAL POSTED TO THE LEDGER

AT THE END OF THE ACCOUNTING PERIOD

STEP 4: PREPARATION OF STEP 5: PREPARATION OF STEP 6: PREPARATION OF
TRIAL BALANCE WORKSHEET INCLUDING FINANCIAL STATEMENTS
ADJUSTING ENTRIES

STEP 7: ADJUSTING ENTRIES STEP 8: CLOSING JOURNAL STEP 9: PREPARATION OF

ARE JOURNALIZED AND ENTRIES ARE JOURNALIZED POST-CLOSING TRIAL
POSTED AND POSTED BALANCE

AT THE START OF THE NEXT PERIOD

STEP 10: REVERSING JOURNALS ENTRIES ARE
JOURNALIZED AND POSTED
 Accounting Cycle

Step 1 Step 2 Step 3 Step 4

Accounting Cycle

Step 1 Step 2 Step 3

 Accounting Cycle

1. Identify the transaction from source documents.

2. Indicate the accounts (Asset, Liabilities, Equity,
Step 1: Income, Expenses) affected by the transaction.
TRANSACTION 3. Ascertain whether each account is increased or
ANALYSIS decreased by the transaction.
4. Using the rules of debit and credit, determine
whether to debit or credit the account to record its
increase or decrease.
 Step 1: TRANSACTION ANALYSIS

1.Source Documents
Identify and describe the transactions and events entering in the
accounting process.
Original written evidences that contains the nature and amount of
transaction.
Examples:
Sales Invoice, Cash Register Tapes, Official Receipts, Bank Deposit
Slips, Bank Statements, Checks, Purchase Orders, Time Cards
Accounting Cycle

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 Accounting Cycle

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 Journal (book of original
entry)
– chronological record of
the entity’s transactions.
Step 2: Journalizing is the process
TRANSACTIONS of recording a transaction.
ARE RECORDED This shows all the effects
IN THE JOURNAL
of a business transaction
in terms of debits and
credits.
General Journal is the
simplest form of journal.
Types of Journal
Entries
Simple Journal Entry
– two accounts are
affected (one debit and
one credit).
Compound Journal
Entry
– three or more
accounts are required
in the journal entry.
 Step 2: Transactions are recorded in the
Journal
Example
Double-entry System are Example
observed in each Initial Investment (Source of Assets)
transaction Esterlina Gevera decided to organize her
wedding consultancy. She invested P250,000
• Two or more accounts into this entity.
are affected by each
transaction. Cash 250,000
Gevera, Capital 250,000
• The sum of the debits for
every transaction equals Rent Paid in Advance (Exchange of Assets)
the sum of the credits. Rented office space and paid two months’
rent in advance, P8,000.
• The equality of the Prepaid Rent 8,000
accounting equation is Cash 8,000
always maintained.
 Step 2: Transactions are recorded in the
Journal
Example
Example
Note Issued for Cash (Source of Assets)
Gevera issued a promissory note for a P210,000 loan from Metrobank. This
availment will be used for the acquisition of a service vehicle. The note carries
a 20% interest per annum. Both interest and principal are payable in full in one
year.
Cash 210,000
Notes Payable 210,000
Service Vehicle Acquired for Cash (Exchange of Assets)
Acquired service vehicle for P420,000.
Service Vehicle 420,000
Cash 420,000
 Step 2: Transactions are recorded in the
Journal
Example
Example
Insurance Premiums Paid (Exchange of Assets)
Paid Prudential Guarantee and Assurance, Inc. P14,400 for one year
comprehensive insurance coverage on the service vehicle.
Prepaid Insurance 14,400
Cash 14,400
Office Equipment Acquired on Account (Exchange and Source of Asset)
Acquired office equipment from Fair and Square Emporium for P60,000;
paying P15,000 in cash and the balance next month.
Office Equipment 60,000
Cash 15,000
Accounts Payable 45,000
 Step 2: Transactions are recorded in the
Example
Journal

Example
Supplies Purchased on Account (Source of Assets)
Purchased supplies on credit for P18,000 from San Jose Merchandising.
Supplies 18,000
Accounts Payable 18,000
Accounts Payable Partially Settled (Use of Assets)
Paid San Jose Merchandising P10,000 of the amount owed.
Accounts Payable 10,000
Cash 10,000
 Step 2: Transactions are recorded in the
Journal
Example
Example
Revenues Earned and Cash Collected (Source of Assets)
Coordinated and finalized simple bridal arrangements for 3 couples and
collected fees of P8,800 per couple. Services include prospecting and
selecting the church and reception location, couturier, caterer, car service,
flowers, souvenirs, and invitations.
Cash 26,400
Consulting Revenues 26,400
Salaries Paid (Use of Assets)
Paid salaries P6,600. The entity pays salaries every two Saturdays.
Salaries Expense 6,600
Cash 6,600
 Step 2: Transactions are recorded in the
Journal
Example
Example
Unearned Revenues Collected (Source of Assets)
The entity is earning additional revenues by referring consulting clients to friendly
hotels, caterers, printers, and couturiers. Received P10,000 advance fees for 3
clients referred.
Cash 10,000
Unearned Referral Revenues 10,000
Revenues Earned on Account (Source of Assets)
Coordinated and finalized elaborate bridal arrangements for 3 couples and billed
fees of P12,000 per couple. Additional services include documents preparation,
consultation with a feng shui expert as to the ideal wedding date for prosperity
and harmony, provision for limousine service and honeymoon trip.
Accounts Receivable 36,000
Consulting Revenues 36,000
 Step 2: Transactions are recorded in the
Journal
Example
Example
Withdrawal of Cash by Owner (Use of Asset)
Gevera withdrew P14,000 for personal expenses.
Gevera, Withdrawals 14,000
Cash 14,000
Salaries Paid (Use of Assets)
Paid salaries, P7,200.
Salaries Expense 7,200
Cash 7,200
Expenses Incurred but Unpaid (Exchange of Claims)
Received the ICC-BayanTel telephone bill, P1,400.
Utilities Expense 1,400
Utilities Payable 1,400
 Step 2: Transactions are recorded in the
Journal
Example

Example
Accounts Receivable Partially Collected (Exchange of Assets)
Received P24,000 from two clients for services billed last May 19.
Cash 24,000
Accounts Receivable 24,000
Expenses Incurred and Paid (Use of Assets)
Settled the electricity bill of P3,000 for the month.
Utilities Expense 3,000
Cash 3,000
 Accounting Cycle

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 Accounting Cycle

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 Ledger – grouping of the entity’s account. Firms use various ledgers
to accumulated certain detailed information; all firms have a
general ledger.

Step 3: JOURNAL  General Ledger – reference book, used to classify and

summarize transactions, and to prepare data for basic financial
ENTRIES ARE statements.
POSTED TO THE  Subsidiary Ledger – a record that shows detailed transactions of
LEDGER a specific customer or supplier.
Classification of Accounts in the General Ledger
1. Permanent/Real Accounts – these are the balance sheet
accounts. It accumulates and are forwarded in the next
accounting period.
2. Temporary/Nominal Accounts – these are the income statement
accounts. These are closed every accounting period.
Each account has its own record in the ledger. Compared to a
journal, a ledger organizes information by account.
 Step 3: JOURNAL ENTRIES ARE POSTED TO THE LEDGER

Posting – transferring the amounts from the journal to the

appropriate accounts in the ledger.
CASH ACCOUNTS RECEIVABLE PREPAID INSURANCE
250,000 8,000 36,000 24,000 14,400
210,000 420,000 12,000 14,400
26,400 14,400
SUPPLIES SERVICE VEHICLE
10,000 15,000
18,000 420,000
24,000 10,000 18,000 420,000
6,600
14,000 PREPAID RENT OFFICE EQUIPMENT
7,200 8,000 60,000
3,000 8,000 60,000
520,400 498,200
22,200
Step 3: JOURNAL ENTRIES ARE POSTED TO THE LEDGER
NOTES PAYABLE GEVERA, CAPITAL SALARIES EXPENSE
210,000 250,000 6,600
210,000 250,000 7,200
13,800
ACCOUNTS PAYABLE GEVERA, WITHDRAWALS
10,000 45,000 14,000 UTILITIES EXPENSE
18,000 14,000 1,400
10,000 63,000 3,000
CONSULTING REVENUES
53,000 4,400
26,400
UTILITIES PAYABLE 36,000
1,400 62,400
1,400
UNEARNED REFERRAL REVENUES
10,000
10,000
 Accounting Cycle

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 Accounting Cycle

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 Chart of Accounts – listing of all accounts and their
account numbers. The chart is arranged in the financial
Step 3: statement order: Assets, Liabilities, Owner’s Equity,
JOURNAL ENTRIES Income, and Expenses.
ARE POSTED TO
THE LEDGER When analyzing transactions, the accountant refers to
the chart of accounts to identify the pertinent
accounts to be increased or decreased.
 Step 3: JOURNAL ENTRIES ARE POSTED TO THE LEDGER
Trial Balance – list of all accounts Wedding "R" Us
Trial Balance
with their respective debit or May 31, 2021
credit balances. It is prepared to Cash 22,200
verify the equality of debits and Accounts Receivable 12,000
Supplies 18,000
credits in the ledger at the end of Prepaid Rent 8,000
the accounting period. It is a Prepaid Insurance 14,400
control device that helps minimize Service Vehicle 420,000
Office Equipment 60,000
accounting errors. Notes Payable 210,000
Accounts Payable 53,000
Utilities Payable 1,400
However, the equality provides an
Unearned Referral Revenues 10,000
interim proof of the accuracy of Gevera, Capital 250,000
the records but it does not signify Gevera, Withdrawals 14,000
Consulting Revenues 62,400
the absence of errors.
Salaries Expense 13,800
Utilities Expense 4,400
586,800 586,800
 Types of Error in Trial Balance
Error in Posting a  Incorrect amount was posted to the account.
Transaction to the  Debit entry was posted as a credit or vice versa.
Ledger  Debit or credit posting was omitted.

Error in determining the  Balance was incorrectly computed.

Account balances  Balance was entered in the wrong balance column.

 One of the columns of the trial balance was

incorrectly added.
Error in preparing the  Amount of an account balance was incorrectly
Trial Balance recorded on the trial balance.
 Debit balance was recorded on the trial balance or
credit vice versa, or a balance was omitted entirely.
Locating Errors in Trial Balance
1. Adding back the amounts in the column in an opposite direction.
2. Get the discrepancy and try the following:
 If the difference is divisible by 9, transposition (reversing the order of
numbers) or slide (moving of the decimal point).
 Scan the columns for an amount equal to exactly one-half of the
discrepancy.
 Look for the exact amount of the discrepancy.
3. Compare the accounts and amounts in the trial balance with that in
the ledger. Be certain that no amount is omitted.
4. Recompute the balance of each ledger account.
5. Look for Omission and Misposting.