Chapter 1 - Review of Accounting Process

Republic of the Philippines
SURIGAO DEL SUR STATE UNIVERSITY

Rosario, Tandag City, Surigao del Sur
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MODULE I
Review of Accounting Process
1
Introduction: Lesson
Accounting is a great course to study for a number of
reasons. Accounting provides you with skills and knowledge that can be
applied to a number of industries. In fact, so long as there are businesses in
the world, accountants will always be needed. The accounting cycle is a
series of steps performed during the accounting period (some throughout
the period and some at the end) to analyze, record, classify, summarize,
and report useful financial information for the purpose of preparing
financial statements. The accounting cycle ensures that all accounts are
updated and maintained so all payments owed to the company are
addressed. This is important since the accounts receivable representatives
will get the company's owed funding to keep the finances balanced.
This module covers the following topics:
 Definitions of Accounting
 Nature of Accounting
 Functions of Accounting
 Accounting Cycle/Process
 Recording Phase
 Summarizing Phase
Intended Learning Outcomes:
1. Review the basic principles and concepts learned in accounting

2. Identify and explain the basic steps in the accounting process
(accounting cycle).
3. Analyze transactions and make and post journal entries.
4. Make adjusting entries, produce financial statements, and close
nominal accounts.
5. Distinguish between accrual and cash-basis accounting.
Instructional Materials
 Lecture notes
Definitions of Accounting
Accounting has been commonly defined as:

1. The process of identifying, measuring, and communicating
economic information to permit informed judgments and decisions
by users of the information.
Partnership and Corporation Accounting, Judith M. Josoy-Sanchez, PhD-BM (CAR) Page 1

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2. 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 financial character and interpreting the result
thereof.
Nature of Accounting
1. Accounting is a Service Activity. It serves as a bridge for users to
meaningfully understand financial reports from which to draw sound
economic decisions.
It is an information system that measures business activities,
processes information into reports, and communicates the report to
the decision makers.
2. Accounting is the language of business. It is the medium of
communication through which financial reports are furnished to
different parties for decision making. It interprets and communicates
the true status of the business in terms of its operating results and
financial condition.
Functions of Accounting
1. Main Function - To provide quantitative information, primarily
financial in nature, about economic activities, that is intended to be
useful in making economic decision.
2. Basic Function - To record and report accurately the economic
reality of the business.
3. Audit Function - To test the truthfulness of the financial reports, to
trace fraudulent transactions and to locate and rectify accounting
errors.
The Accounting Cycle

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Also called “accounting process,” this refers to a series of repetitive
activities of recording, summarizing and recording economic transactions
from the beginning to the end of the accounting period.
The accounting process involves the following aspects:
1. Identifying. This includes recognizing business transactions or events
that are reportable.
2. Measuring. This assigns peso amounts to the accountable economic
transactions and events.
3. Communicating. This constitute the preparation and distribution of
accounting reports to potentials users of accounting information.
The communicating aspects of accounting involves the recording
and summarizing phase.
The Recording Phase of Accounting
The recording phase of accounting involves the following:
1. Documentation
Transactions to be reported in the books of accounts should be
supported by the documents such as sales invoice, purchase contract,
vouchers, etc.
2. Recording
a) Recording to the general journal
The economic transactions based on the supporting documents are
chronologically recorded with explanations in the general journal (or
special journal). The journals are termed “books of original entries.”
b) Posting to the general ledger
- At the end of the day (or of the week or month), the recorded
transactions in the general journals are summarized or posted to the
general ledger of each account.
- The ledgers are called “books of final entries” because the
balances of accounts in the ledger may be used to prepare
financial statements.
- Based on the analysis done in the working paper, the adjusting
entries made after these are journalized are also posted to the
general ledger.
The Adjusting Entries
At the end of the period, some accounts contain a mixture of asset
and expense; hence, they must be segregated through adjusting entries.

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The assets accounts should be purely separated from the expense
accounts to achieve proper income determination and report proper
financial conditions.
The Closing Entries
At the end of the period, nominal accounts (income statement
accounts) and drawing accounts are closed to the capital accounts. This is
necessary in order not to mix economic transactions of the current period
with the economic transactions of the next period.
The Reversing Entries
Reversing entries are inverted adjusting entries made at the start of
the accounting period. These are done before the recording of the regular
transactions of the next accounting period.
The purpose of reversing entries is not to correct the adjusting entries
but to simplify the recording of recurring transactions of the next
accounting period.
Reversing entries are made on adjusting entries for accruals, expense
method of prepayments and income method of precollections.
The Summarizing Phase of Accounting
The summarizing phase of accounting involves the following activities:
1. Preparation of Trial Balance
This is an optional process. The trial balance is prepared to test the
balance of debit and credit totals, but not the accuracy of the
accounts in the accounting records.
2. Preparation of Working Paper
The use of working paper is also an optional process. The working
paper starts with the unadjusted trial balance, adjustments, and
adjusted balances of the income and financial position statements’
accounts. The working paper makes the preparation of financial
statements more convenient.
3. Preparation of Post-Closing Trial Balance
The post closing trial balance contains the real accounts with open
balances after the adjusting and closing entries are made in the
general ledger.
4. Preparation of Financial Statements
Although financial statements can be prepared directly from open
balances of the general ledger accounts, it is preferable that the

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accounts in the financial statements are taken from the working
paper because they should only contain adjusted accounts.
Comprehensive Illustration
The following are the transactions of MY Enterprises for the year:
Summary of Official Receipts issued for cash collected
1. Initial investment of owner to start the single proprietorship, P100,000.00.
2. Cash sales of merchandise, P500,000.00.
3. Collections of accounts receivable, P800,000.00
4. Collection from rent of a vacant space of business premises (recorded
under income method), P60,000.00
Summary of Cash Vouchers paid
Payments of:
5. Business registration and permits, P5,000.00
6. Store supplies purchased (expense method), P1,500.00.
7. Payroll, net of 20% withholding tax and 5% SSS employee’s share P54,000.00
8. Cash purchase of goods for sale (periodic system), P400,000.00
9. Accounts payable, P500,000.00
10. Utilities, P18,000.00
11. Remittance of SSS employee and employer share (equally), P7,200.
12. Remittance of withholding tax to BIR, P14,000.00
13. One year rent of the business land and building (expense method), P150,000.00
14. Down payment for purchase of business delivery van, P100,000.00
Other information
15. Total sales of goods on account, P1,000,000.00
16. Total purchases of goods on account, P725,000.00

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17. Total Purchase price of delivery van, P500,000.00 0f which P400,000.00
was issued with promissory note.
After recording the above transactions in the journal and after posting
them in their respective accounts, the following general ledger balances
are extracted:
M Y C a p it a l
D e b it C r e d it
1) 100,000.00

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From the above information in the general ledger, the following unadjusted
trial balance could be extracted:
The account balances reported in the trial balance will have to be

analyzed for any required adjustments.

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The following additional information are gathered as o December 31, 200X:
1. The accounts receivable is estimated to be of ½% uncollectible.

2. The delivery equipment which was acquired October 1, 200X is being
depreciated over 10 years under the straight-line methods with 10% of cost
as estimated scrap value.
3. Rent income collected for the year is for 12 months, starting April 1, 200X.
4. Employee’s salary of P900 was already rendered but remains unpaid as
of December 31, 200X.
5. Rent payment for the year is for 12 months, starting March 1, 200X.
6. The actual physical count at the end of the year reported the following:
a. Merchandise, valued at P15,000.00
b. Store Supplies valued at P1,000.00
To facilitate the discussion, the following financial information are required:
1) Working paper
2) Financial Statements
a. Income statement
b. Statement of Financial Position (formerly Balance Sheet)
c. Statement of Changes in Capital
3) Adjusting Entries
4) Closing entries
5) Post-closing Trial Balance

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(1) Working Paper
The difference of the income statement and financial position columns should be the same. It
represents either net income or net loss of the period. If the credit total of the income statement
column
Partnership and Corporation Accounting, Judith is greater than PhD-BM
M. Josoy-Sanchez, the debit(CAR)
total, there is net income,
Page 9 otherwise there is net loss.
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(2) Financial Statements

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(3) Adjusting Entries

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(4) Closing Entries
(5) Post Closing Trial Balance

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Procedures/Lesson Development
1. Introduce to the students a brief introduction of the course, including
the rationale, description and objectives.
2. Present the lecture notes and other instructional materials to the
students and discuss the topics to ensure full understanding of the
topic.
3. Encourage the students to participate in online/offline
activities/exercises.
4. Give chapter test/evaluation to assess learning of the students

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Republic of the Philippines

SURIGAO DEL SUR STATE UNIVERSITY

This module covers the following topics:

Intended Learning Outcomes:

1. Review the basic principles and concepts learned in accounting

Accounting has been commonly defined as:

Partnership and Corporation Accounting, Judith M. Josoy-Sanchez, PhD-BM (CAR) Page 1

Partnership and Corporation Accounting, Judith M. Josoy-Sanchez, PhD-BM (CAR) Page 2

Partnership and Corporation Accounting, Judith M. Josoy-Sanchez, PhD-BM (CAR) Page 3

Partnership and Corporation Accounting, Judith M. Josoy-Sanchez, PhD-BM (CAR) Page 4

Partnership and Corporation Accounting, Judith M. Josoy-Sanchez, PhD-BM (CAR) Page 5

Partnership and Corporation Accounting, Judith M. Josoy-Sanchez, PhD-BM (CAR) Page 6

The account balances reported in the trial balance will have to be

Partnership and Corporation Accounting, Judith M. Josoy-Sanchez, PhD-BM (CAR) Page 7

1. The accounts receivable is estimated to be of ½% uncollectible.

Partnership and Corporation Accounting, Judith M. Josoy-Sanchez, PhD-BM (CAR) Page 8

(1) Working Paper

Partnership and Corporation Accounting, Judith M. Josoy-Sanchez, PhD-BM (CAR) Page 10

Partnership and Corporation Accounting, Judith M. Josoy-Sanchez, PhD-BM (CAR) Page 11

(5) Post Closing Trial Balance

Partnership and Corporation Accounting, Judith M. Josoy-Sanchez, PhD-BM (CAR) Page 12

Partnership and Corporation Accounting, Judith M. Josoy-Sanchez, PhD-BM (CAR) Page 13

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