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Accounting Process
Accounting Process
ACCOUNTING PROCESS
Steps in the Accounting Cycle – There are 9 basic steps in the accounting cycle, which includes 2
phases known as recording and summarizing.
RECORDING PHASE
1. Analyzing the transaction (business document)- This is where the accountant gathers
information from source documents and determines the impact of the transaction on the financial
position as represented by the equation “assets equals liabilities plus equity”.
2. Journalizing – This is the process of recording the transactions in the appropriate journals. A
journal is a chronological record of transactions also known as the book of original entry.
Although all transactions could be recorded in the general journal, it is more efficient to use
special journals in recording a large number of like transactions. Special journals that enterprises
usually use are:
1. Sales Journal – Only sales of merchandise on account are recorded.
2. Cash receipts journal – All types of cash receipts are recorded.
3. Purchase journal – Used to record all purchases on account (merchandise, equipment
and supplies).
4. Cash disbursement journal – All payments of cash for any purpose are recorded.
Type of journal entries according to form:
1. Simple journal entry – One which contains a single debit and a single credit element.
2. Compound journal entry – One which has two or more elements and often representing
two or more transactions.
Accounts are the storage units of accounting information and used to summarize changes in
assets, liabilities and equity including income and expenses. The following are a broad
classification of kinds of accounts:
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SUMMARIZING PHASE
4. Preparing the unadjusted trial balance – A list of general ledger accounts with their respective
debit or credit balance. The purpose of the unadjusted trial balance is to provide evidence that
the total debits in the general ledger equal the total credits and prepares the accounts for
adjustments.
Prepaid Expenses
Asset Method Expense Method
Adjustment:
Expense xx Prepaid expense (asset) xx
Prepaid expense xx Expense xx
Cash xx Cash xx
Unearned Income (liab.) xx Income xx
Adjustment:
Unearned Income xx Income xx
Income xx Unearned Income (liab.) xx
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7. Preparing the closing entries – Recorded and posted for the purpose of closing all nominal or
temporary accounts to the income summary account and the resulting net income or loss is
afterwards closed to the capital or retained earnings account.
8. Preparing the post closing trial balance – A listing of general ledger accounts and their
balances after closing entries have been made. The post closing trial balance is the same with
the year-end statement of financial position, the only difference is that valuation accounts like
allowances for assets are found in the credit side instead of being deducted from the related
asset account.
9. Preparing reversing entries – The last and optional step in the accounting cycle. Reversing
entries are made at the beginning of the new accounting period to reverse certain adjusting
entries from the succeeding accounting period.
The purpose of reversing entries is a matter of convenience for accruals and consistency for the
adjustments in the following year for prepaid expenses and deferred income when the income
statement method was used to record the cash flow.
Once again, reversing entries will only apply to the following but remember that they are not
necessary and only optional:
1. Accrued income
2. Accrued expense
3. Prepaid expense, only if the expense method was used in recording the payment
4. Unearned income, only if the income method was used in recording the collection
END
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