The Accounting Process

Accounting Cycle

• The accounting cycle represents the steps or accounting procedures normally used by entities to
record transactions and prepare financial statements.

Steps in the Accounting Cycle

1. Identifying and analyzing transactions

2. Journalizing

3. Posting

4. Preparing the unadjusted trial balance

5. Preparing the adjusting entries

6. Preparing the adjusted trial balance

7. Preparing the financial statements

8. Closing the books

9. Preparing the post-closing trial balance

10. Preparing the reversing entries

The Double-Entry System

Under the Double-entry system, each transaction is recorded in two parts – debit and credit. The
double-entry system makes use of the following concepts:

• Duality – this concept views each transaction as having a two-fold effect on values – a value
received and a value parted with, and each transaction is recorded using at least two accounts.

• Equilibrium – this concept requires each transaction to be recorded in terms of equal debits and
credits.

Accounting Records

• Journal – “book of original entry”

a. General Journal –used to record transactions other than those that are recorded in the
special journals.

b. Special Journal – used to record transactions of a similar nature.

 • Ledger – “book of final entry”

– is a systematic compilation of a group of accounts.

a. General ledger – contains all accounts appearing in the financial statements.

b. Subsidiary ledger – supporting ledger for controlling accounts in the general ledger.

Account

• Account is the basic storage of information in accounting, e.g., “cash,” “land,” “accounts
payable,” etc. Accounts in the ledger follow the format of a T-account.

• Chart of accounts - list of all the accounts used by the entity.

• Real accounts, Nominal accounts, Mixed accounts, Contra accounts, and Adjunct accounts.

Trial balance

• Trial Balance – is a list of general ledger accounts and their balances. It is prepared to check the
equality of total debits and total credits in the ledger.

Adjusting entries

• Adjusting entries are entries made prior to the preparation of financial statements to update
certain accounts so that they reflect correct balances as of the designated time.

Financial statements

• Financial statements are the means by which the information accumulated and processed in
financial accounting is periodically communicated to the users.

• A complete set of financial statements consists of:

1. Statement of financial position;

2. Statement of profit or loss and other comprehensive income;

3. Statement of changes in equity;

4. Statement of cash flows;

5. Notes;

• Comparative information; and

6. Additional statement of financial position (required only when certain instances occur).

Methods of initial recording of income and expenses

• Income

a. Liability method
b. Income method
 • Expenses

a. Asset method
b. Expense method

Reversing entries

• Reversing entries may be made on the following:

a. all accruals,
b. prepayments initially recorded using the expense method, and
c. unearned income initially recorded using the income method.