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ACCOUNTING CYCLE
- a series of sequential steps or procedures performed to accomplish the
accounting process.

STEPS:
During the period
The following steps of accounting occur or to be accomplished during the
accounting period.
STEP 1: Identification of events to be recorded
- Aim: To gather information about transactions or events generally
through source documents.
STEP 2: Transactions are recorded in the journal
- Aim: To record economic impact of transactions on the firm in a journal
which is a form that facilitates transfer to the accounts.
STEP 3: Journal entries are posted to the ledger.
- Aim: To transfer the journal to the ledger for classification.
At the end of the accounting period
After you are done with step 3, you will do the next steps which are
prepared at the end of the accounting period.
STEP 4: Preparation of Trial Balance
- Aim: To provide a listing to verify the equality of debits and credits
in the ledger.
STEP 5: Preparation of Worksheet including adjusting entries
- Aim: To aid in the preparation of financial statements.
STEP 6: Preparation of financial statements
- Aim: To provide useful information to decision makers.
STEP 7: Adjusting journal entries are journalized and posted
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- Aim: To record the accruals, expiration of deferrals, estimations and

other events from the worksheet.
STEP 8: Closing journal entries are journalized and posted
- Aim: To close temporary accounts and transfer profit to owner’s equity.
STEP 9: Preparation post closing trial balance
- Aim: To check the equality of debits and credits after closing entries.
At the start of the next period
The final step for the accounting cycle is the step 10 which is:
STEP 10: Reversing journal entries are journalized and posted
- Aim: To simplify the recording of certain regular transactions in the
next accounting period.

--Can you recall from your Fundamentals of ABM 1 what type of accounting
principle is referred to when business activities are divided into short
time period? Yes! You are correct, periodicity concept.

JOURNALIZING TRANSACTIONS
What is a journal?
- Journal is a record of financial transactions in order by date. This
often defined as the book of original entry. Making a record in a journal
is referred as journal entry or simply an entry.
First form of a journal entry is the simple journal entry.
- one debit account and one credit account
Second form of a journal entry is the compound journal entry.
- more than one debit or more than one credit or both.
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Account Classifications Normal Balances

ASSETS DEBIT
CONTRA ASSETS CREDIT
LIABILITY CREDIT
CONTRA LIABILITY DEBIT
OWNER’S EQUITY/CAPITAL CREDIT
OWNER’S DRAWINGS DEBIT
REVENUE OR INCOME CREDIT
EXPENSES DEBIT
GAINS CREDIT
LOSSES DEBIT

1. What are the contra- asset accounts?

- An account with a balance that is the opposite of the normal balance.
For example, Accumulated Depreciation is a contra asset account, because
its credit balance is contra to the debit balance for an asset account.
Another example is the doubtful account, the contra account of accounts
receivable.
2. What does PR in journal entry stand for? What is it?
- A posting reference column, often abbreviated PR, is a column in the
general journal that is used to indicate when entries have been posted to
the ledger accounts.In the journal, the posting reference cites the
account number to which the entry was posted.
3. In preparing journal entry, do I need to indent the credit account
always?
- The credits are indented to emphasize that they are credits, and the
total debits must always equal the total credits. Each journal entry is
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given a date and a reference number to make it easy to lookup the journal
entry if necessary at a later time.

POSTING TO THE LEDGER AND PREPARING TRIAL BALANCE

The Ledger
The entire group of accounts maintained by the business is called ledger.
It keeps in all one place all the information about changes in specific
account balances.
You may also write the date of the transaction beside the debit and credit
amounts and the posting reference beside the account title. A footing is
the final balance when adding all of the debits and all of the credits in
accounting. The debits are tallied, followed by the credits, and the two
are netted to compute the account balance.
--The rule to get the balance of the asset accounts is add if the entry is
debit and deduct if it is credit. Do this in all the account titles
following their normal balances.
The Trial Balance
- At the end of the accounting period, when all journal
entries are posted to the ledger, next step is to check the
equality of debit and credit balances of all accounts. This
can be done by having atrial balance.
How to prepare a trial balance?
A. Write the name of the business, title of the report and the period
covered by the report.
B. Prepare columns for Account titles, posting reference, debit and credit
balance of each account from the ledger.
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REVIEWING ADJUSTING ENTRIES

Definition - Adjusting entries are journal entries made at the end of the
accounting period.
Purpose - For proper matching of revenues and expenses.

Types of Adjusting Entries

These are the types of adjusting entries:
Accruals - Recognize income earned regardless of when it is collected and
record expense incurred whether paid or not.
Deferrals - Recording advance collection of income (unearned income) or
recording advance payment of expenses (prepaid expense)
Doubtful Account - Provision for uncollectible accounts.
Depreciation - Allocation of the cost of an asset to expense.

Accruals
Accruals has two types the accrued income and the accrued expense.
What is accrued income? It is income already earned but not yet collected,
in other words receivable.
What is accrued expense? Expense that is already incurred but not yet paid
or payable.

Deferrals
The same with accruals, deferral has also two types the Unearned Income
and the Prepaid Expense.
What is unearned income? This is advance collection of payment and service
is not yet rendered.
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What are prepaid expenses? Expenses that have been paid in advance but are
not yet used up or expired.

Depreciation
Depreciation refers to the losing value of tangible assets over time. Just
like your cellphone, the physical assets of the company lose their values
because of constantly using it. The purpose of recognizing depreciation is
the matching principle of accounting which states that the cost of the
asset must be matched to the revenue earned from such.
To calculate the depreciation of an asset, the following must be consider
a. Acquisition Cost- is the amount paid or liability incurred when the
fixed asset was acquired. It includes the purchase price and other
incidental expenses of its acquisition.
b. Scrap Value - the estimated value of the asset at the end of its
economic or useful life. This is sometimes called salvage or residual
value.
c. Estimated Useful or Economic Life - the estimated length of time
usually stated in years that the asset is usable.
The straight-line method computes depreciation by using the formula:

Doubtful Accounts
It is an estimate of the amount of accounts receivable which is expectedly
least to be collected. It is a contra asset account reduces the amount of
accounts receivable.
Take note on the following accounts:
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Estimated Uncollectible Account - A contra-asset account that provides for

possible losses from uncollectible accounts.
Uncollectible Account Expense - Anticipated loss that the business ma inc arising from
uncollectible accounts.

IDENTIFYING THE ELEMENTS OF STATEMENT OF FINANCIAL POSITION

The Financial Statements
- These are reports prepared by the company to present the financial
position and performance of the business for a particular period.These are
the main outputs of the accounting process.
Different Financial Statements
Statement of Financial Position or Balance Sheet - a financial statement
that shows the financial condition or position of the company.
Statement of Financial Performance or Income Statement - a financial
statement that shows the result of operations for a given period.
Statement of Changes in Owner’s Equity - a financial statement reflecting
the changes in the capital of owner’s equity as a result from additional
investment or withdrawals by the owner, plus or minus the net income or
net loss for the period.
Cash Flow Statement - a financial statement showing the summary of cash
receipts and disbursement for the accounting period.

The Statement of Financial Position

- depicts the financial position of a business entity and is affectedby
1) the economic resources it owns and controls;
2) its financial structure and;
3) its liquidity and solvency.
Its components include Assets, Liabilities and Equity.
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ASSETS
- are resources controlled by the enterprise and from which future
economic benefits are expected to flow to the firm when it is realized.
Examples are Cash on hand, Cash in bank, Marketable securities, Accounts
receivable, Notesreceivable, Other receivables, Merchandise inventory,
Prepaid expenses, Allowance for baddebts(contra asset), Land, Building,
Equipment, Furniture and fixtures, Leasehold improvements,Accumulated
depreciation (contra asset)

LIABILITIES
- are present obligation of the enterprise and from which an outflow of
resources are expected upon its settlement.
Examples are Accounts payable, Note payable, Loan payable, Utilities
payable, Other payable,Mortgage payable, and bond payable.

EQUITY
- is the residual or what is left when liabilities are deducted from
assets.
Owner’s, Capital and the contra-account, Owner’s, Withdrawals.
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The Accounting Equation

Accounting Equation is “ASSETS = LIABILITY + EQUITY” . The total assets
should always equal the total liabilities and equity.

ELEMENTS OF FINANCIAL POSITION INTO CURRENT AND NON-CURRENT

ITEMS
Classifying the Elements into Current and Non-current Category
What are assets and liabilities again?
Assets – are resources, tangible or intangible, which are controlled by
the enterprise.
Liabilities – are present obligation or debt of the business arising from
past events, the settlement of which is expected to result in an outflow
of assets embodying economic benefits.
Current assets are those assets that are expected to be converted to cash,
sold or consumed during the next 12 months within the business normal
operating cycle if longer than one year.
Non-current assets all assets other than current assets. They are used to
operate the business and are not held for sale.
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Current liabilities are those obligations due to be paid within one year.
Non-current liabilities are those obligations that are not due to be paid
within one year.

PREPARING STATEMENT OF FINANCIAL POSITION OF A SINGLE

PROPRIETORSHIP
This statement can be reported in two different formats: account form and
report form.
The account form consists of two columns displaying assets on the left
column of the report and liabilities and equity on the right column. You
can think of this like debits and credits. The debit accounts are
displayed on the left and credit accounts are on the right.
The report form, on the other hand, only has one column. This form is more
of a traditional report that is issued by companies. Assets are always
present first followed by liabilities and equity.
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Always remember that this statement must be balanced that the total assets
agree with the total liabilities and equity.

PREPARING STATEMENT OF COMPREHENSIVE INCOME

- A Statement of Comprehensive Income is a combination of two statements

that shows how a business entity performed during a
particular period.
Statement of comprehensive income begins with the profit
and loss (bottom line of the income statement) and
displays the items of other comprehensive income for the
reporting period.
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Income statement displays components of the profit and loss.

Two elements of Income Statement
* Revenue
* Expenses
These two are matched and the difference is profit or loss.
Mathematically, Income Statement is presented as:
Profit/Loss = Revenues minus Expense
Profit if: Revenues > Expenses (Revenue is more than Expenses)
Loss if: Revenue< Expenses (Revenue is less than Expenses)
Other Comprehensive Income
- which consists of gains and losses.

How to prepare a Statement of Comprehensive Income?

The statement of comprehensive income of a single proprietorship business
may be prepared using the single step approach. In the income statement
there are presentation of expenses based on the nature of the expense and
based on its function.
Nature of expense – this form presents the expenses according to their
nature: depreciation, advertising, transportation, employee benefits. This
is normally used for a simple business such as that of a service provider.