REVIEW OF THE ACCOUNTING PROCESS
FINANCIAL ACCOUNTING AND REPORTING
I. WHAT IS ACCOUNTING CYCLE
• A series of well-defined steps leading to the
communication of the effects of a business transaction.
The accounting cycle implements the accounting
process from period to period.
• A set of procedures used in identifying, recording,
classifying, and interpreting information related to the
transactions and other events of a business enterprise.
II. STEPS IN ACCOUNTING CYCLE
1. Gather business documents and analyze business
transactions
2. Journalize business transactions
3. Post to the general ledger
4. Prepare trial balance
5. Journalize and post the adjusting entries
6. Prepare and complete the worksheet
7. Prepare financial statements
8. Journalize and post the closing entries
9. Prepare post-closing trial balance
10. Journalize and post the reversing entries
III. INDENTIFYING AND ANALYZING EVENTS AND
TRANSACTIONS
• The process of selecting a transaction or event and
analyzing its impact on financial position
• An event or transaction is selected for recording if it
complies with the criteria for accountable events set
under double-entry principles.
• Dual effects principle – each recorded event affects at least
two items in the financial accounting record
• Events are analyzed to determine their effects on
financial position of the enterprise. Accordingly, the
effects of the events on the financial position of the
enterprise are measured and represented by money
amounts.
• Business documents/ source documents – original source
materials evidencing a transaction (e.g. sales invoice,
purchase invoice, official receipts, debit or credit
memoranda, etc.)
IV. JOURNALIZING
V. POSTING
• Journalizing is the process of recording transactions by
means of a journal entry in the journal
• This process entails the recording in chronological order
of the accountable events, by means of debits and
credits, in a journal.
• Journal entries provide a systematic method for
summarizing a business event’s effect on the basic
accounting equation.
• Journal – a formal record or book of original entry where
transactions are recorded for the first time
• Recognition – process of incorporating in the statement of
financial position or statement of comprehensive
income an item that meets the definition of an element
and satisfies the criteria for recognition
• Types of journal entries as to the time prepared:
a. Current entries – entries to record transactions
completed by the business during a given
period
b. Adjusting entries – entries made at the end of the
accounting period to update certain amounts
so that they reflect correct balances at a
designated time
c. Closing entries – entries made at the end of the
accounting period after adjustments, by means
of closing nominal accounts to a summary
account transferring the balances to Capital
d. Reversing entries – entries made at the start of the
subsequent accounting period to reverse
certain adjusting entries made in the
immediately preceding accounting period
e. Correcting entries – entries made to correct entries
made in error
f. Reclassification entries – entries that transfer an
item from one account to another that may
clearly describe the nature of the item
transferred.
• Types of Journals
a. General journal – simple journal with two money
column. Records all transactions not recorded
in special journals.
b. Special journal – multi-column book to record
transactions of a similar nature. This type of
journal records frequently recurring
transactions
• Some Commonly-used Types of Special Journals
a. Cash receipts journal – records all cash receipts
b. Cash disbursement journal – records all cash
disbursements
c. Sales journal – records sales made on account
d. Purchase journal – records purchases made on
account
• The process of transferring data from the journal to the
appropriate accounts in the ledger. Posting serves to
classify the effects of transactions on specific asset,
liability, proprietorship, revenue and expense accounts.
• Posting is done by transferring debits and credits to
ledger accounts
• Ledger – systematic compilation of a group of accounts
• Account – accounting devices used to summarize change
in asset, liability or capital. It is used as the storage unit
 of information in double-entry system. An account is
composed of three parts; namely, the name of the
account (account title), the left side of the account
(debit), the right side of the account (credit).
• Chart of accounts – summarizes the existing accounts used
by a particular entity
• Types of Ledger
a. General ledger – contains all accounts appearing
in the financial statements
b. Subsidiary ledger – Supporting ledger consisting
of a group of accounts of similar nature, the
total of which is in agreement with a
controlling account in the general ledger.
Subsidiary ledger contains supporting detail for
the balances of control accounts in the general
ledger.
• Types of Accounts
a. Real account/Permanent account – accounts that
are reported in the statement of financial
position (i.e., asset, liability and capital
accounts)
b. Nominal account/Temporary account – accounts
that are reported in the statement of
comprehensive income (i.e., revenue and
expense accounts)
c. Mixed account – account that includes a part that
should be reported the income statement and a
part that should be reported in the statement
of financial position. This happens before
preparing adjusting entries (e.g. prepaid
expenses and unearned revenue)
d. Contra account – account with a balance that is
opposite of the normal balance; normally
shown as a reduction to a specific account (e.g.,
accumulated depreciation, discount on notes
payable and sales returns and allowances)
e. Adjunct account – valuation account that
increases the book value or carrying value of a
specific account (e.g., premium on notes
receivable and premium on bonds payable)
VI. TRIAL BALANCE
• The process of listing down of accounts with open
balances in order to prove the mathematical accuracy of
the debits and credits in the ledger
• Types of trial balances as to the time of preparation
a. Unadjusted trial balance – prepared before the
preparation of adjusting entries. Includes real,
nominal and mixed accounts.
b. Adjusted trial balance – prepared after adjusting
entries are journalized and posted. Includes real
and nominal accounts
c. Post-closing trial balance – prepared after closing
entries are journalized and posted. Includes real
accounts only.
• Errors revealed by a trial balance
a. Transplacement error – error in placing decimal
points (e.g. P9,600.00 instead of P96,000.00)
b. Transposition error – switching of two adjacent
numbers when posting a transaction (e.g.
P9,600.00 instead of P6,900.00)
c. Error in posting one side of an entry
d. Omission in posting one side of an entry
• Errors not revealed by a trial balance
a. Wrong computation
b. Wrong classification of account
c. Double-posting both sides of an entry
d. Omission in posting both sides of an entry
e. Omission in journalizing a transaction
VII. ADJUSTING ENTRIES
• Adjusting entries are made at the end of the accounting
period to update or bring to their correct balances
certain asset, liability, revenue or expense accounts.
• All relevant information that has not been recorded must
be determine, recorded and posted so that accounts are
updated prior to preparing financial statements.
• Purposes of adjusting entries
a. To take up unrecorded income and expenses
for the period
▪ Accrued expense – expenses incurred, but not to
be paid until a following period
▪ Accrued income – income earned, but not to be
received in cash until a following period
b. To split mixed accounts into their real and
nominal elements
▪ Prepaid expense – recorded cash payments for
benefits not yet received or only partially so
▪ Unearned income – recorded cash receipts for
services to be rendered in the future or only
partially rendered at the reporting date
▪ Bad debts/Doubtful accounts – estimated amount
of uncollectible accounts receivable charged to
current period’s income as bad debts expense
▪ Inventory
▪ Depreciation – systematic allocation of an asset’s
cost to expense and a reduction, using contra
accounts, in carrying value for a period during
which the asset is used in operations
VIII. WORKSHEET
• Worksheet – is an analytical device used in accounting to
facilitate the gathering of data for adjustment, the
preparation of financial statements and closing entries.
IX. FINANCIAL STATEMENTS • Reversing entries – made on the first day of the succeeding
• Financial statements are means by which the accounting period to reverse certain adjusting entries
information is accumulated and processed in financial done in an immediately preceding period
accounting • Adjustments requiring reversing entries:
• Components of the Basic Financial Statements a. Accrued expense
a. Statement of Financial Position – a formal b. Prepaid expense under expense method
statement showing assets, liabilities, capital or c. Unearned income under income method
the financial position of an enterprise as of a
given date.
b. Statement of Comprehensive Income – presents the
revenue, expenses, gains and losses both
realized and unrealized, that are the result of
the enterprise’s profit-directed activities during
a given period of time
c. Statement of Changes in Equity – shows the
movements in the elements of the components
of capital/stockholders’ equity which includes
the net income and items such as withdrawals,
appropriations and adjustments of net income
of prior periods
d. Statement of Changes in Cash Flows – is a statement
that summarizes the cash inflows and outflows
arising from operating, financing and investing
activities of the enterprise for a given period of
time
e. Notes to Financial Statements – contain
explanatory material, and disaggregation of
certain items in the face of the financial
statements, as well as other significant
quantifiable and non-quantifiable information
that are necessary on making economic
decisions

X. CLOSING ENTRIES
• Closing the books is the process of preparing closing
entries and ruling and balancing real accounts. This
means that all nominal/temporary account balances are
brought to zero at the end of the period.
• Closing entries – entries prepared at the end of the
accounting period to “empty” or bring to zero all nominal
accounts in the ledger
• Steps in preparing closing entries
a. Close all nominal accounts to Income and
Expense Summary account
b. Close all Income and Expense Summary
account to Drawing account
c. Close Drawing account to Capital

XI. POST-CLOSING TRIAL BALANCE

• The purpose of a post-closing trial balance is to prove
the equality of the debits and credits in the ledger after
the closing process

XII. REVERSING ENTRIES

• Reversing entries are prepared for the convenience in
recording accruals and consistency in recording deferrals
 QUIZZER – THEORIES 7. The system of bookkeeping whereby, as a general rule, only
cash and personal accounts are recognized and is deemed to
1. This is the means by which a reporting entity records and be incomplete bookkeeping
stores financial and managerial information from its a. Double-entry
transactions or economic events so that it can retrieve and b. Single-entry
report the information in an accounting statement c. Cash basis
a. Accounting system d. Accrual basis
b. Bookkeeping system
c. Internal control system 8. All of the following are disadvantages of the single-entry
d. Ledger system bookkeeping system, except:
a. Accounting records are incomplete
2. Also known as the recording phase of accounting. The b. Accrual basis financial statements cannot be prepared
systematic and chronological recording of transactions and c. Internal control is inadequate
events in the books of account is known as d. Financial statements are not likely to be fairly presented
a. Accounting in accordance with GAAP
b. Bookkeeping
c. Record-keeping 9. The primary characteristics that distinguishes double entry
d. Auditing bookkeeping from single-entry is
a. It recognizes the two-fold effect of each event affecting
3. The series of well-defined steps followed and completed the enterprise
within an accounting period to record transactions and b. A complete set of journals and ledgers is maintained
prepare financial statements under double-entry c. A trial balance is periodically prepared
bookkeeping system is d. Accrual basis accounting is used
a. Operating cycle
b. Business cycle 10. The basic classification category and storage unit for
c. Accounting cycle information in a double entry system is the
d. Cash conversion cycle a. Business document
b. Journal
4. Which one of the following is among the conditions that will c. Ledger
qualify a situation, particular action or set of circumstances as d. Account
an accountable event?
a. It has happened or will happen within a short period of 11. Which is false concerning the rules of debit and credit?
time a. The left side of an account is always the debit side and
b. It affects an accounting element(s) either increasing or the right side is always the credit side
decreasing it b. The normal balance of any account appears on the side
c. It involves an exchange of values between the business used for recording increases
enterprise and a third party c. The rules of debit and credit cannot be amended over
d. It can be measured accurately in monetary terms time
d. The word debit means to increase and the word credit
5. The system of bookkeeping that recognizes the two-fold means to decrease
effect of an accountable event is known as
a. Double-entry 12. Which of the following operations in the financial accounting
b. Single-entry process determine how events affect the assets, liabilities,
c. Cash basis owners’ equity, revenue, and expenses of the enterprise?
d. Accrual basis a. Analyzing the events
b. Measuring the effects
6. Double-entry bookkeeping requires that c. Recording the events
a. Every transaction affect both an asset account and either d. Summarizing the recorded effects
a liability or owner’s equity account
b. The number of ledger accounts with debit balances is 13. Which of the following operations involves the assignment
equal to the number with credit balances of peso amounts to accountable events?
c. The total peso amount of debit entries posted to the a. Analyzing the events
general ledger is equal to the total peso amount of the b. Measuring the effects
credit entries c. Recording the events
d. The number of debit entries posted to the ledger equals d. Summarizing the recorded effects
the number of credit entries
14. Which of the following operations can be performed by a
computer without requiring an accountant’s judgment?
a. Analyzing the events
b. Measuring the effects
c. Recording the events
d. Summarizing the recorded effects
15. The first step in the accounting cycle is
a. Record transactions in the journal
b. Analyze transactions from source documents
c. Post journal entries to general ledger accounts
d. Adjust the general ledger accounts
16. At what step in the accounting cycle is GAAP typically
applied?
a. Journalizing
b. Posting
c. Trial balance preparation
d. All of the above
17. Transactions and events are analyzed according to the rules
of debit and credit
a. After selecting the event and before an entry is recorded
in the journal
b. After the entry is recorded in the journal and before it is
posted in the ledger
c. When adjusting entries are prepared
d. After adjusting entries and before preparation of the
financial statements and closing entries
18. Which of the following documents does not initiate an entry
to be made in the books of accounts?
a. Sales invoice
b. Purchase invoice
c. Purchase order
d. Credit memorandum
19. A firm’s chart of accounts is
a. A flowchart of all transactions
b. A list of names of all account titles used by an economic
entity
c. An accounting procedures manual
d. A journal
20. Which of the following statements states the primary purpose
of a general journal?
a. The general journal provides a continuing balance of the
amount to date in each of the temporary accounts
b. The general journal provides an organized summary, in
chronological order, of the transactions of the entity
c. The general journal directly provides the data for a trial
balance
d. The general journal eliminates the need for control
accounts in the ledger
21. Which is false concerning the use of special journals?
a. Sales of merchandise are recorded in the sales journal
and sale of any item for cash is recorded in the cash
receipts journal
b. Only cash sales are recorded in the cash receipts journal
c. Payment of interest incurred during the year arising from
a bank loan is recorded in the cash disbursement journal
d. Purchase of property and equipment on account is
recorded in the general journal
22. One of these is not an advantage of using special journal
a. Division of labor is possible
b. Possibility of error is minimized
c. Number of postings is reduced
d. Space and effort in recording transactions is reduced
23. Which of the following statements pertaining to the use of
special journals is (are) true?
Statement I: Transactions that cannot be appropriately
recorded in a special journal are recorded in the general
journal
Statement II: If entity is using a one-column sales journal,
sale of merchandise on account are recorded in the sales
journal whiles cash sales are recorded in the cash receipts
journal.
Statement III: Voucher register and check register are also
classified as special journals.
a. Only Statement I is true
b. Only Statement II is true
c. Statements I and II are true
d. All of the statements are true
24. A systematic compilation of account titles of asset, liability,
equity, revenue and expense accounts which is also called a
“book of final entry” is known as
a. Journal
b. Ledger
c. Worksheet
d. Trial balance
25. Which of the following statements is incorrect?
a. Accounts are arranged in the general ledger following the
“financial statement order”
b. The ledger is also known as the book of final entry
c. Posting is the process of transferring the debit and credit
changes in account balances from the ledger to the
journal
d. A ledger account shows in one place all the information
about changes in specific asset or liability, or owner’s
equity
26. A listing of the components of account balances which
relieves the general ledger of detail thereby facilitating the
preparation of a trial balance is known as
a. Subsidiary ledger
b. Private ledger
c. Worksheet
d. Register
27. Which of the following types of accounts measure economic
flows over a period of time?
a. Real accounts
b. Nominal accounts
c. Mixed accounts
d. Summary accounts
28. An auxiliary account that has the same balance as the
principal account is a (an)
a. Contra account
b. Adjunct account
c. Offset account
d. Controlling account
29. Which of the following best defines a controlling account?
a. A summary account in the general ledger that is
supported by detailed accounts in a subsidiary ledger
b. A listing of the balances in all accounts
c. An account which increases due to sale of goods or
services during the normal operations of a business
d. A chronological listing of all transactions for a specific
time period
30. Which of the following statements is false?
a. Before year-end adjustments are prepared, a building
account is a mixed account
b. A contra account has the opposite balance of its
principal account while an adjunct account has the same
balance as its principal balance
c. Contra accounts appear only in the balance sheet
d. A principal account is an account that can stand alone
31. A notation entered in a journal or ledger, not intended to be
formally incorporated in the accounts, which describes a
situation or event, with or without money values is knows as
a. Footnote
b. Negative entry
c. Memorandum entry
d. Reciprocal entry
32. A trial balance will disclose that an error has been made in
a. Entering an amount on the wrong side of an account
b. Mathematical computation of the interest expense on a
note payable
c. Posting an amount to the wrong ledger account
d. Posting a journal entry twice in the general ledger
33. A trial balance that contains real accounts only is
a. Interim balance
b. Unadjusted trial balance
c. Adjusted trial balance
d. Post-closing trial balance
34. The primary purpose of preparing a trial balance is to
determine that
a. The ledger contains an equal peso amount of debit and
credit entries
b. The ledger contains an equal number of debit and credit
entries
c. The number of ledger accounts with debit balances is
equal to the number of accounts with credit balances
d. Each transaction was recorded with equal amounts of
debits and credits
35. Which of the following statements regarding a trial balance is
incorrect?
a. A trial balance should always balance
b. A trial balance is a test of the equality of the debits and
credits in the ledger
c. A trial balance that is in balance proves that no error of
any kind has been made in the accounts during the
accounting period
d. A trial balance is useful in the preparation of the income
statement and the balance sheet
36. Adjusting entries are needed
a. Whenever revenue is not received in cash
b. Whenever expenses are not paid in cash
c. Primarily to correct error in the initial recording of
business transactions
d. Whenever transactions affect the revenue or expenses of
more than one accounting period
37. Which of the following concepts is least related to adjusting
entries
a. Accrual
b. Approximation
c. Materiality
d. Matching of cost against revenue
38. Adjusting entries involve
a. Only real accounts
b. Only nominal accounts
c. Only capital accounts
d. At least one real and one nominal account
39. Which one of the following is a purpose of adjusting entries?
Statement I: To apportion the proper amounts of revenue
and expense to the current accounting period
Statement II: To establish the proper amounts of assets and
liabilities in the balance sheet
 Statement III: To accomplish the objective of offsetting the 45. Which of the following is not a factor to consider in
revenue of the period with all the expenses incurred in determining the money columns of a periodic worksheet?
generating that revenue a. The nature of business
b. The concept or basis used in accounting for revenue and
Statement IV: To prepare the revenue and expense accounts
expenses
for recording transactions of the following period
c. The amount of capital of the business
d. The type of ownership of the business
a. I and II only
b. II and III only
46. The purpose of making closing entries is to
c. I, II and III only
a. Prepare revenue and expense accounts for the recording
d. All of these
of the next period’s revenue and expenses
b. Enable the accountant to prepare financial statements at
40. The entry to record depreciation is an example of an adjusting
the end of the accounting period
entry
c. Establish new balances in the balance sheet accounts
a. To apportion a recorded cost
d. Reduce the number of revenue and expense accounts
b. To apportion unearned revenue
c. To record unrecorded expense
47. The effect of closing entries is to
d. To record unrecorded revenue
a. Change assets
b. Change liabilities
41. Assume that a company’s fiscal year ends on December 31,
c. Change capital
which of the following events involves an adjusting entry that
d. Change debit balances of all accounts into credits and
would be affected by how the event was originally recorded?
vice-versa
a. Sale of merchandise on account
b. Signing a one-year lease for a building
48. The purpose of the post-closing trial balance is to
c. Salaries earned by employees this year will be paid next
a. Provide the account balances for preparation of the
year
balance sheet
d. Payment of rent for 6 months coverage starting October
b. Ensure that the ledger is in balance for the start of the
1 of current year
next period
c. Aid the journalizing and posting of the closing entries
42. If the advance payment of an expense was initially recorded
d. Ensure that the ledger is in balance for completion of
in an expense account, the adjusting entry will involve
the worksheet
a. A debit to the asset account and a credit to the expense
account in the amount of the unexpired portion
49. Reversing entries are used
b. A debit to the asset account and a credit to expense in
a. Primarily to simplify the bookkeeping during the next
the amount of the expired portion
accounting period
c. A debit to expense and a credit to the asset account in
b. To adjust the inventory account under a periodic
the amount of the unexpired portion
inventory system
d. A debit to expense and a credit to the asset account in
c. To close the income summary account
the amount of the expired portion
d. To establish appropriate contra accounts
43. Rent revenue collected one month in advance should be
50. Which of the following steps in the accounting cycle are
accounted for as
optional?
a. Revenue in the month collected
a. Trial balance and adjusting entry
b. Accrued liability
b. Trial balance, worksheet and adjusting entry
c. A separate item in equity
c. Worksheet, preparation of financial statements, closing
d. Current liability
entries
d. Worksheet, post-closing trial balance and reversing
44. An analytical device used by accountants to facilitate the
entries
gathering of data for adjustments, and the preparation of
adjusting and closing entries
a. Trial balance
b. Worksheet
c. Account
d. Ledger