ACCOUNTING CYCLE

Step 1 Documentation. Analyzing business documents which serve as a

basis of recording transactions.
Step 2 Journalizing. Recording business transactions in the journal to
have chronological records of economic activities.
Step 3 Posting. The information in the general journal is transferred to
the General Ledger to create a record of classified accounts.
Step 4 Preparation of Trial Balance. A trial balance is prepared to
prove the equality of debits and credits in the general ledger.
Step 5 Adjusting entries. Making end of period adjustments before
financial statements are prepared so that the income and expense
in the income statement are reported at their correct amounts.
Step 6 Worksheet. Work sheet is prepared to facilitate the preparation
of financial statements.
Step 7 Financial Statement. The basic financial statements are prepared
after making the necessary adjustments.
a. Income Statement
b. Balance Sheet
c. Statement of Cash Flows
d. Statement of Changes in Equity
e. Notes to financial statement
Step 8 Journalizing and posting closing entries. The objective of
closing entry is to transfer the revenue, expense and drawing
accounts to the capital account.
Step 9 Preparation of a Post-closing trial balance
Step 10 Reversing journal entries (made at the start of the next period)

CHART OF ACCOUNTS
It is a list of Assets, Liabilities, Revenue, Expense and Capital Accounts
applicable to the business enterprise. It normally includes brief description
of the nature of transaction, identification number or account number.
Presented below is the chart of accounts for the illustration.

W. KAYAYAN ACCOUNTING FIRM

CHART OF ACCOUNTS
Balance Sheet Accounts Income Statement Accounts
ASSETS REVENUE
110 Cash 410 Service Revenue
120 Accounts Receivable
130 Notes Receivable EXPENSES
140 Office Supplies 510 Office Supplies Expense
150 Land 520 Utilities Expense
160 Office Equipment 530 Salaries Expense
165 Accumulated Dep. O/E 540 Telephone Expense
170 Furniture & Fixtures 550 Interest Expense
175 Accumulated Dep. F/F 560 Rent Expense
570 Depreciation Expense –O/E
LIABILITIES 580 Depreciation Expense –F/F
210 Accounts Payable 590 Miscellaneous Expense
220 Notes Payable
230 Utilities Payable
240 Salaries Payable
250 Interest Payable
260 Unearned Revenue

EQUITY
310 W. Kayayan, Capital
320 W. Kayayan, Withdrawals
330 Income Summary
JOURNALIZING

THE JOURNAL

The journal is a chronological record of the entity’s transactions. It is

called the book of original entry. A journal entry shows all the effects of a
business transaction in terms of debits and credits. Each transaction is
initially recorded in a journal rather than directly in the ledger. The
general journal is the simplest journal.

Simple and Compound Entry

In a simple entry, only two accounts are affected – one account is debited
and the other account is credited. However, some transactions require the use
of more than two accounts. When three or more accounts are required in a
journal entry, the entry is referred to as a compound entry.

Format

Date: The year and month are not written for every written entry unless
the year or month changes or a new page is needed.
Account Titles and Explanation: The first line of an entry shows the account
debited and the second line is the account credited. The account
credited is indented to the right. For each entry, a brief
explanation is required enough to understand the nature of the
transaction.
Posting Reference: This column is filled up only when the entry is
transferred to the next book of accounts, the ledger. Posting
reference column is where the account number of each account is
written.
Debit: The debit amount for each account is entered in this column.
Credit: The credit amount for each account is entered in this column.

ILLUSTRATION

Once again, let us review the transactions of the newly organized accounting
firm of Mr. Kayayan.

May 1. Mr. W. Kayayan invested P100,000 to start an accounting office.

May 3. Purchased office supplies worth P20,000 on account.
May 5. Purchased additional office supplies for cash, P10,000.
May 6. Paid the accounts payable in full.
May 8. Purchased 2 units of computer with printer for P50,000, 30 days.
May 10. Rendered accounting services for cash, P25,000.
May 15 Rendered accounting services on account, P 30,000.
May 15 Paid Meralco bills, P 3,500.
May 15 Paid salaries for the period, P15,000.
May 20 Collected P10,000 from customer.
 May 22 A Short term loan from a local bank was granted in the amount of
P50,000, less P5,000 financing charges. Mr. W. Kayayan issued 1 year
promissory note.
May 25 Paid telephone bill amounting to P 6,000.
May 27 Mr. Kayayan withdrew P20,000 for personal use.
May 30 At the end of the month, physical count of the office supplies revealed
that P 5,000 had been consumed.

GENERAL JOURNAL PAGE No. 1

Date Account Titles and Explanation PR Debit Credit
2014
1 Cash 110 1 0 0 0 0 0
May
W. Kayayan, Capital 310 1 0 0 0 0 0
Initial investment of the
owner
140 2 0 0 0 0
3 Office Supplies 210 2 0 0 0 0
Accounts
Payable
Office supplies purchased on account. 140 1 0 0 0 0
110 1 0 0 0 0
5 Office
Supplies
Cash 210 2 0 0 0 0
Office Supplies purchased. 110 2 0 0 0 0

6 Accounts
Payable Cash 160 5 0 0 0 0
Full payment of account. 210 5 0 0 0 0

8 Office Equipment
Accounts Payable 110 2 5 0 0 0
Computer units purchased 410 2 5 0 0 0

10 Cash
Service Revenue 220 3 0 0 0 0
Service revenue 410 3 0 0 0 0
rendered.

15 Accounts Receivable 520 3 5 0 0

Service revenue 110 3 5 0 0
Service revenue rendered on account.

15 Utilities
Expense
Cash
Paid meralco bill.
2014
15 Salaries Expense 530 1 5 0 0 0
May
Cash 110 1 5 0 0 0
Paid Salary of office staffs

20 Cash 110 1 0 0 0 0
Accounts Receivable 120 1 0 0 0 0

Collection of account

22 Cash 110 4 5 0 0 0
Interest Expense 550 5 0 0 0
Notes Payable 220 5 0 0 0 0
Proceeds of loan.

25 Telephone Expense 540 6 0 0 0

Cash 110 6 0 0 0
Paid telephone bill.

27 W. Kayayan, Withdrawals 320 2 0 0 0 0

Cash 110 2 0 0 0 0
Withdrawal by the owner.

30 Office Supplies Expense 510 5 0 0 0

Office Supplies 140 5 0 0 0
Office Supplies consumed.

Take note that the post reference of the general journal is not filled up yet
in the process of recording. This will filled in the posting process.

POSTING

THE LEDGER

A grouping of the entity’s accounts is referred to as a ledger. Although some

firms may use various ledger to accumulate certain detailed information, all
firms have a general ledger. A general ledger is the reference book of the
accounting system and is used to classify and summarize transactions, and to
prepare data for basic financial statements.

The accounts in the general ledger are classified into two general groups:
 Permanent/Real accounts –balance sheet accounts
 Temporary/Nominal accounts –income statement accounts
 Posting means transferring the amounts from the journal to
the appropriate accounts in the ledger. The steps are
illustrated as follows:
1. Transfer the date of the transaction from the journal to the
ledger.
2. Transfer the page number from the journal to the journal
reference.
3. Post the debit figure from the journal as a debit
figure in the ledger and the credit figure from the
ledger as a credit figure in the ledger.
4. Enter the account number in the posting reference
column of the journal once the figure has been posted
to the ledger.

Illustration:

Account: Cash Account No.: 110

Date Explanation J.R. Debit Credit Balance
2009
May 1 Initial Investment J-1 100,000.00 100,000.00
3 Office Supplies purchased J-1 10,000.00 90,000.00

Account: W. Kayayan, Capital Account No.: 310

Date Explanation J.R. Debit Credit Balance
2009
May 1 Initial Investment J-1 100,000.00 100,000.00

Account: Office Supplies Account No.: 140

Date Explanation J.R. Debit Credit Balance
2009
May 3 Office Supplies purchased J-1 10,000.00 10,000.00

LEDGER ACCOUNTS POSTING

At the end of the accounting period, the debit and credit
balance of each account must be determined to enable us to
come up with a trial balance.
 Each account balance is determine by footing (adding)
all the debits and credits.
 If the sum of an account’s debit is greater than the
sum of its credits, that account has a debit balance.
 If the sum of its credits is greater, that account has
a credit balance.