
Accounting
Process
Question 8-1
What are the steps in the accounting cycle?
1. Analyzing the business documents or
transactions. This means that the
accountant determines the impact of the
transactions on the financial position as
represented by the basic equation “assets
equal liabilities plus equity”.
2. Journalizing- This is the process of recording
the transactions in a journal.
3. Posting- Transactions as classified and
recorded in the journal are transferred to
the appropriate accounts in the general
ledger and subsidiary ledger, if appropriate.
4. Preparing the unadjusted trial balance
5. Preparing the adjusting entries
6. Preparing the financial statements
7. Preparing the closing entries
8. Preparing a post-closing trial balance
9. Preparing the reversing entries
Accounting process can be classified into 2 parts:
 Recording Phase: includes analyzing the
transaction, journalizing and posting.
 Summarizing Phase: includes the
unadjusted trial balance, adjusting entries,
financial statements, closing entries, post-
closing trial balance and reversing entries.
The post-closing trial balance, reversing
entries and worksheet are optional.
Question 8-2
What is a journal?
A journal is a chronological record of transactions.
General Journal
-most fundamental journal, and often called
simply as journal.
-consists of the transaction date, the
accounts and amounts to be debited, the
accounts and amounts to be credited, and a
brief explanation of the transaction.
 Simple Journal
-consists of one debit and one credit.
 Compound Journal
- Consists of two or more debits or two or
more credits.
Question 8-3
What is a Ledger?
 General Ledger
-often called simply as the ledger, is a group
of accounts.
An account is the accounting device used in
summarizing the effects of transactions on each
asset, liability, equity, revenue and expense.
The accounts used by a particular entity are usually
expressed in the form of chart of accounts.
A chart of accounts is a listing of all entity’s general
ledger accounts in a systematic form.
Question 8-4
What is a trial balance?
 Trial Balance
-is a list of general ledger accounts with
their respective debit or credit balance.
-prepared at this time if often called the
unadjusted trial balance because account
balances do not yet reflect adjustments.
-is prepared at the end of every accounting
period after all transactions for the period
have been recorded and posted to the
general ledger.
 -a control device that helps eliminate
accounting errors.
When total debits do not equal total credits, the
trial balance is out of balance. This condition alerts
the accountant that errors have been made.
On the other hand, if the total debits equal total
credits, the trial balance is said to be in balance.
However, this condition does not necessarily signify
the absence of errors.
For example, the trial balance does not indicate the
failure to record a transaction or the recording of a
transaction in the wrong accounts.
Question 8-5
What are the purpose of a trial balance?
- Provides evidence that the total debits
in the general ledger equal credits.
- Provides information that helps the
accountant to formulate adjustments.
Question 8-6
Describe transportation, transplacement and error
of omission
Transposition: The figures are interchanged. For
example, P1, 234 is written as P4, 123.
Transplacement: Error in placing the decimal point.
For example, P12, 000 is written as P1, 200.
Error of omission: A transaction is not recorded.
For example, a sale of P10, 000 is not journalized.
Question 8-7
What are the 2 methods of recording expenses?
 Expense Method
-the original payment is debited to an
expense account.
For example, the payment for a one-year insurance
premium is debited to insurance expense account.
 Asset Method
-the original payment is debited to an
asset account.
For example, the payment for a one-year insurance
premium is debited to prepaid insurance account.
Question 8-8
What are the 2 methods of recording income?
 Income Method
-an income account is credited for the
receipt of the income.
For example, the receipt of a one-year rental is
credited to rental income account.
 Liability Method
-a liability account is credited for the
receipt of the income.
For example, the receipt of a one-year rental is
credited to unearned rental income account.
Question 8-9
What are adjusting entries?
 Adjusting Entries
-made at the end of every accounting
period in order to split mixed accounts
or to bring the accountants up to date.
-allocate revenue and expenses
between current and future periods.
Moreover, every adjusting entry affects both a
real account and a nominal account. Under the
cash basis of accounting, revenue is recorded only
when cash is received, and expenses are recorded
when paid in cash.
In contrast, the accrual basis of accounting requires Accrued Expense xx
recognition of revenue when earned and
6. Deferred Income
recognition of expenses when incurred.
-is income already received but not yet
Generally accepted accounting principles require earned and therefore a liability.
the use of accrual accounting. Accordingly,
If the liability method is used or if the account
adjusting entries ae necessary for a fair and
appearing on the trial balance is a liability account,
accurate measurement of performance and
the adjusting entry is:
financial position on the accrual basis.
Deferred Income xx
Income xx
Question 8-10
If the Income method is used or if the account
What are the items that normally require appearing on the trial balance is an income
adjusting entries? Indicate the pro forma account, the adjusting entry is:
adjustment.
Income xx
1. Ending Inventory
Inventory- end xx Deferred Income xx
Income summary or cost of sales xx 7. Accrued Income
2. Doubtful accounts -is income already earned but not yet
Doubtful accounts xx received and therefore an asset.
Allowance for doubtful accounts xx
Accrued Income xx
3. Depreciation
Income xx
Depreciation xx
Accumulated depreciation
xx Question 8-11

4. Prepaid Expense What is a worksheet?

-are already paid but not yet incurred and  Worksheet
therefore an asset. If the asset method is -is multicolumn sheet of paper that an
used or if the account appearing on the trial accountant uses in compiling and
balance is an asset account, the adjusting summarizing the information necessary
entry is: for the preparation of the financial
Expense xx statements.
Prepaid Expense xx -is not a formal statement.
-is only a tool of an accountant in the
If the expense method is used or if the preparation of financial statements.
account appearing on the trial balance is an
expense account, the adjusting entry is: The accountant prepares a worksheet at that stage
Prepaid Expense xx of the accounting cycle when it is time to make
Expense xx adjustments and prepare financial statements.

5. Accrued Expense
-are expenses already incurred but not yet
A worksheets facilitates the preparation of financial
paid and therefore a liability.
statements by:
Expense xx
 a. Providing place where adjusting entries can
be made informally before they are
journalized and posted.
b. Providing an orderly means whereby each
account can be classified according to the
financial statement in which it will appear.
c. Providing a balancing mechanism that helps
to uncover accounting errors.
Actually, the balancing figure in the worksheet is
the net income or net loss.
If the total of the debits exceeds the total of the
credits in the income statement columns, there is a
net loss.
Accordingly, in the statement of financial position
columns, if the total of the credits exceeds the total
of the debits, there is also a net loss.
If the total of the credits exceeds the total of the
debits in the income statement columns, there is a
net income.
Accordingly, in the statement of financial position
columns, if the total of the debits exceeds the total
of the credits, there is also a net income.
Question 8-12
What are closing entries?
 Closing Entries
-made at the end of an accounting
period after adjusting entries and
financial statements have been
prepared for the purpose of closing all
nominal or temporary accounts.
To close an account means to reduce its balance
to zero.
Closing nominal accounts is logical because they
measure activities that have occurred during a
given period of time.
At the end of an accounting period, nominal
accounts have served their purpose.
Thus, their balances must be reduced to zero so
that the new nominal accounts can be used to
measure activities in the next accounting period.
Actually, nominal accounts are temporary equity
accounts.
Accordingly, their balances may be transferred
directly to an equity account during closing.
However, most accountants transfer nominal
accounts to a clearing account known as income
summary.
The income summary account summarizes the net
income or net loss for the period and its balance is
ultimately closed to capital in the case of a
proprietorship or retained earnings in the case of a
corporation.
Question 8-13
What is a post-closing trial balance?
 Post-closing trial balance
-simply a listing of general ledger
accounts and their balances after the
closing entries have been made.
-consists entirely of real or permanent
accounts.
Question 8-14
What are reversing entries?
 Reversing Entries
-are made at the beginning of the new
accounting period in order to transfer all
accrued and prepaid items established
by adjusting entries to the nominal
accounts that are to be used in
recording transactions during the new
period.
-these are called reversing entries
because they are the exact opposite of
certain adjusting entries made at the
end of the preceding period.
 -do not mean that the adjusting entries
reversed are unnecessary or inaccurate.
The sole purpose of reversing entries is to simplify
the recording of certain kinds of recurring
transactions. Account Normal Balance Balance
Balance increased by decreased by
The adjustments normally requiring reversal at the
Asset Debit Debit Credit
beginning of the new period are: Liability Credit Credit Debit
a. Accrued Expense Equity Credit Credit Debit
b. Prepaid Expenses, if the expense method is Revenue Credit Credit Debit
used in recording expense Expense Debit Debit Credit
c. Accrued Income
d. Deferred Income, if the income method is Question 8-16
used in recording income
1. The first step in the accounting cycle is to
-Analyze transactions from source
Question 8-15 documents
2. What is the last step in the accounting
Explain the principle of debit and credit
cycle considering the following?
Debit: left side of an account -Prepare a post-closing trial balance
3. Which is done first in the accounting
Credit: right side of an account
process?
When both sides of an account are each totaled, -Adjusting entries are recorded
and the smaller sum is deducted from the larger 4. Which is not among the first five steps in
sum, the difference is called the balance of the the accounting cycle?
account. -Record closing entries
5. Which is an optional step in the accounting
Every account has a normal balance, which is
cycle?
simply the balance ordinarily found in an account.
-Reversing entries
The normal balance may be either a debit or credit, 6. Which is logical order in the accounting
depending on the type of account. cycle?
-Closing entries, post-closing, reversing
If an account has a normal debit balance, it is
entries
increased when debited and decreased when
7. Factors that shape an accounting
credited.
information system include
If an account has a normal credit balance, it is -Nature of business, size of entity and
increased when credited and decreased when volume of data
debited. 8. Basic steps in the recording process include
all of the following, except
Thus, a debit does not necessarily mean an
-Transfer the journal information to the
increase and a credit does not necessarily mean a
appropriate account in the statement of
decrease.
financial position
Proper analysis of transactions requires 9. The accounting record where a transaction
understanding of the types of accounts with their is initially recorded is
normal balances. -Journal
 10. The use of computers in processing
accounting data
-May result in the elimination of document
trails used to verify accounting records
Question 8-17
1. In recording transactions
-Assets, expenses, and drawing accounts
are debited for increases
2. Which is false concerning the rules of debit
and credit?
-The word “debit” means to increase and
the word “credit” means to decrease
3. Debits
-Increase assets and expenses and
decreases liabilities, revenue and equity
4. Which statement is true regarding debits
and credits?
-The rules for debit and credit and the
normal balance of an equity are the same
as for liability
5. The debit and credit analysis of a
transaction normally takes place
-Before an entry is recorded in a journal
6. Which of the following is not a possible
combination of a journal entry?
-Increase in asset and decrease in equity
7. The normal balance of an account is on the
-Side represented by increase in the
account balance
8. The double entry accounting system means
-The dual effect of each transaction is
recorded with a debit and a credit
Question 8-18
1. The accounting equation must remain in
balance
-Throughout each step in the accounting
cycle
2. The book of original entry is known as
-Journal
3. A general journal
-Chronologically lists transactions and
other events expressed in terms of debit
and credit
4. A simple journal entry
-Consists of one debit and one credit
5. A journal entry that contains more than
two accounts is called
-A compound journal entry
6. Which accounts measure economic flows
over a period of time?
-Nominal accounts
7. Which of the following is a nominal
account?
-Salary expense
8. Nominal accounts are also called
-Temporary accounts
9. Real accounts include all of the following
except
-Dividends
10. Equity is not affected by all
-Cash receipts
Question 8-19
1. Posting is to the process of transferring
information from
-Journal to the general ledger
2. A general ledger is defined as
-The entire group of accounts
3. What function do ledgers serve in the
accounting process?
4.
-Classifying
5. A subsidiary ledger is
-A listing of the components of account
balances
6. A chart of accounts is
-A list of all account titles in the general
ledger
 2. If an expense has been incurred but not
yet recorded, the adjusting entry would
involve
-An expense and an asset
3. The adjusting entry for depreciation has
the same effect as the adjusting entry for
Question 8-20 -A prepaid expense
4. An adjusting entry accrue wages incurred
1. The trial balance
but not yet paid is an example of
-Is useful in preparing the statement of
-Reflecting unrecorded expenses incurred
financial position
during an accounting period
2. Which of the following is not a principal
5. Which of the following least resembles a
purpose of an unadjusted trial balance?
typical adjusting entry?
-It proves that debits and credits were
-Debit an asset and credit liability
properly entered in the ledger accounts
6. An adjusting entry should never include
3. Which statement is true regarding the trial
-Debit expense and credit revenue
balance?
7. Adjusting entries
-Preparation of the trial balance
-Are often prepared after the end of
determines that total debits equal total
reporting period but dated as of the end of
credits
reporting period
4. Which statement regarding a trial balance
-Are necessary to conform with standards
is incorrect?
-Include both accruals and deferrals
-A trial balance proves that no errors of
8. Which statement is incorrect regarding
any kind have been made in the accounts
adjusting entries?
during the accounting period
-Each adjusting entry affects one revenue
5. An unadjusted trial balance
account and one expense account
-Provides information that is helpful when
9. An entity must make adjusting entries
making adjusting entries
-To ensure that the revenue recognition
6. The trial balance
and expense recognition principles are
-Can be used to uncover errors in
followed
journalizing and posting
-Each time it prepares financial statements
7. Numerous errors may exit even though the
-To account for accruals or deferrals
trial balance columns agree. Which is not
10. Which statement best defines an accrual?
one of these errors?
-Adjusting entries where revenue or
-Transportation error
expense recognition precedes cash flow
8. A trial balance may prove that debits and
credits are equal, except
-All of these may prove that debits and
credits are equal Question 8-22
1. A prepaid expense can best be described
as an account
Question 8-21
-Paid and not currently matched with
1. Adjusting entries involve earnings
-One real and one nominal account 2. An accrued expense can best be described
as an amount
 -Not paid and currently matched with -Will balance if a transaction is not
earnings journalized and posted or if a transaction is
3. An accrued revenue can best be described journalized and posted twice
as an amount -Shows that are accounting equation is in
-Not collected and currently matched with balance at the end of the accounting
expenses period
4. An unearned revenue can best be
Question 8-24
described as an amount
-Collected and not currently matched with 1. Reversing entries
expenses -Are desirable to exercise consistency and
5. Which of the following properly describes establish standardized procedures
a deferral? 2. Reversing entries
-Cash is received before revenue is earned -Impact the statement of financial position
and the income statement
3. Which statement regarding reversing
Question 8-23 entries is incorrect?
-Reversing entries change amounts
1. Closing Entries
reported in the statement of financial
-remove the balances from the temporary
position for the previous period
accounts
4. Reversing entries apply to
2. Which of the following closing procedures
-All accruals
in unique to a corporation?
5. Reversing entries apply to all of the
-Close the income summary account to the
following, except
retained earnings account
-Depreciation
3. After the accounts have been closed
6. Adjusting entries that should be reversed
-The revenue, expense, income summary
include
and retained earnings accounts have zero
-All accrued revenue
balances
-All accrued expenses
4. Which statement best describes the
-Those that debit an asset or credit a
purpose of closing entries?
liability
-To reduce the balances of temporary
7. A reversing entry should never be made for
accounts to zero so that these are used to
an adjusting entry that
accumulate the revenue, expenses and
-Adjusts expired costs from an asset
dividends of the next period
account to an expense account
5. The closing entries
8. Adjusting entries that should be reversed
-Are posted to the appropriate general
include those for prepaid or unearned
ledger accounts
items that
6. If income is greater than expenses, the
-Create an asset or a liability account and
income summary account will be closed by
were originally entered in a revenue or
-Debiting income summary and crediting
expense account
retained earnings
9. An entity initially records prepayments in
7. The Post-closing trial balance
real accounts and make reversing entries
-Does not include nominal accounts
when appropriate
8. The Post-closing trial balance
-The adjusting entry to record service fees
-Consists of statement of financial position
earned by year-end but not billed
accounts only
10. An entity initially records prepayments in
nominal accounts
-The adjusting entry to record the portion
of rental received in advance that is
unearned at year-end