ACCOUNTING CYCLE

Definition of Accounting
 Accounting Standards Council (ASC)

 Accounting is a service activity.

 Its function is to provide quantitative information, primarily financial in
nature, about economic entities, that is intended to be useful in making
economic decision.
 The Committee on Accounting Terminology of the American Institute of Certified Public Accountants (AICPA):

 Accounting is the art of recording, classifying and summarizing in a

significant manner and in terms of money, transactions and events
which are in part at least of a financial character and interpreting the
results thereof.
 Definition of Accounting
The American Accounting Association (AAA) in its Statement of Basic
Accounting Theory.
Accounting
is the process of
identifying, measuring and communicating
economic information
to permit informed judgments and decisions
by users of the information.
 Accounting
 Identifying – recognition or non-recognition of events
 Measuring – assigning peso amounts
 Communicating – preparation & distribution of financial
reports
 Recording - Journal
 Classifying – Ledger
 Summarizing – Financial Statements
 Accounting Cycle
 Process (STEPS) in accounting for the preparation and
distribution of Financial Statements
 Financial Statements are the means or medium from which
accounting information is periodically communicated to those
who will use it.
 Main focus of BOOKKEEPING
 Maintenance of accounting records (journal & ledger) for the
eventual preparation of Financial Statements
 Accounting Cycle
1. Analyzing business transaction through source documents.
 Identifications of Events to be recorded
 What ACCOUNTS are affected ?
 INCREASE / DECREASE ?
 Double Entry Bookkeeping / Double Entry System of
Accounting
 At least 2 ACCOUNTS are affected
 At least 1 DEBIT and 1 CREDIT
 TOTAL DEBITS = TOTAL CREDITS
 Accounting Cycle

2. Analyzing and recording of the transaction in a journal called

Journalizing.
 Transactions are recorded in the Journal (BOOK of original
entry)

3. Posting or transferring of the account from the journal to the

ledger.
 Journal entries are posted to the ledger (BOOK of final
entry)
 Accounting Cycle

4. Preparation of the Trial Balance which is a list of account

balances taken from the ledger.
 Trial Balance is a list of all accounts in the business with
their respective current balances.
 Prepare to check the equality of debits and credits among
the balances of all open accounts in the ledger.
 Accounting Cycle
5. Preparation of the working paper as a basis for adjusting certain
ledger accounts.
 Preparation of Worksheet including adjustments (Revenue earned
and expenses incurred for the period)
6. Preparation of the Financial Statements.
 Income Statement (Statement of Comprehensive Income)
 Statement of Changes in Equity
 Balance Sheet (Statement of Financial Position)
 Statement of Cash Flow
 Accounting Cycle
7. Recording and posting of adjusting entries.
 Adjusting Entries are journalized (JOURNAL) and posted
(LEDGER)

8. Recording and posting of closing entries.

 Closing Entries are journalized (JOURNAL) and posted (LEDGER)

9. Ruling and balancing real and nominal accounts.

 Preparation of the BOOKS (Journal & Ledger) for the next
accounting period
 Accounting Cycle
10. Preparation of the Post Closing Trial Balance
 Post Closing Trial Balance is prepared after the closing entries
were journalized and posted

11. Preparation of the Reversing Entries for certain adjusted accounts.

 Reversing Entries are journalized (JOURNAL) and posted
(LEDGER)
 to enable the business to maintain the same method (ASSET &
LIABILITY METHOD or REVENUE & EXPENSE METHOD)
of recording certain transactions from one period to another
Accounting Cycle

 Input: Source Documents

 Books: Journal & Ledger
 Working Paper: Worksheet
 Output: Financial Statements
 Accounting Cycle: INPUT

 Source Documents
 Identify & describe transactions & events entering the
accounting process
 Evidences containing information about the nature & the
amounts of transactions
 Basis for Journal Entries
 Sales invoices, official receipts, bank deposit slips, checks,
statement of account, time cards, contracts, purchase orders
 Accounting Cycle: BOOKS

 Journal
 the book of original entry
 Where transactions are initially recorded in chronological
order
 For each transaction, it shows the debit and the credit effects
of transactions on specific accounts.
Accounting Cycle: BOOKS

 Journal
 The most basic form of journal is a two-column journal
called the general journal.
 Special Journals – other form of journals
 Cash Receipt Journal
 Cash Disbursement Journal
 Sales Journal
 Purchases Journal
 Accounting Cycle: BOOKS
 Ledger
 A group of accounts which contains the entire accounts of a
business.
 The effects of business transactions are classified in
individual accounts and each account has an individual
record in the ledger.
 The process of transferring the entries from the journal to the
accounts in a ledger is called posting.
 Accounting Cycle: BOOKS

 Ledger
 Chart of Accounts
 list of all the accounts of the business and their respective
account numbers.
 arranged in the following order: Assets, Liabilities, Equity,
Income and Expenses,
 Table of contents of a ledger
 Accounting Cycle: WORKING PAPER
 Worksheet
 a columnar device that provides an efficient way to facilitate
the preparation of the financial statements
 help transfer data from the unadjusted trial balance to the
financial statements;
 not part of the journal or ledger, nor is it a financial statement
 used as the basis for journalizing the adjusting entries,
preparing the Income Statement and the Balance Sheet, and
also, for recording the closing entries.
Accounting Cycle: FINANCIAL
STATEMENTS
 Income Statement
 Statement of Changes in Equity
 Statement of Financial Position (Balance Sheet)
 Statement of Cash Flow
Types of Entries

 Journal Entries
 Adjusting Entries
 Closing Entries
 Reversing Entries
Trial Balance

 Unadjusted Trial Balance

 Adjusted Trial Balance
 Post Closing Trial Balance
 Classification of Accounts

 Real / Permanent
 Balance Sheet
 Financial Position
 Assets, Liabilities, Capital
 Nominal / Temporary
 Income Statement
 Financial Performance
 Revenue, Expenses, Withdrawal
End…