ACCT 102

Accounting – the process of identifying, measuring and communicating economic information to permit
informed judgements and decisions by users of the information.
Accounting Information System- system of collecting and processing transaction data and
disseminating financial information to interested parties. A subsystem of Management Information System
(MIS)
Management Information system- a set of data gathering, analyzing, and reporting functions
designed to provide management with the information it needs to carry out its functions.
Components of Accounting Information System
1. Personnel directly involved in accounting Frame work
2. Accounting policies and standards
Accounting Policies are the specific principles, bases, conventions, rules and practices applied by an
entity in preparing and presenting financial statements.
3. Procedures or set of interrelated activities involving the originating processing and reporting of financial and
related information.
4. Equipment and devices used in the system to expedite work, to provide controls and prevent fraud and errors
5. Records and reports necessary to gather, process, store and transmit financial and other information.

Accounting Cycle- represents the steps or procedures used in recording transactions and preparing
financial statement.
Steps in the Accounting cycle
1. Identifying and analyzing business documents or transactions
The accountant gathers information from source document and determines the effects of the transactions
on the accounts.
2. Journalizing- identified accountable events are recorded in the journals
3. Posting- information from the journal are transferred to the ledger.
4. Preparing the Unadjusted trial balance- the balances of the general accounts are proved as to the equality of
debits and credits.
-serves as basis for adjusting entries.
5. Preparing the Adjusting Entries- the accounts are updated as of the reporting date on accrual basis by
recording accruals, expiration of deferrals, estimations, and other events often not signaled by new source
documents.
6. Preparing the Adjusted Trial Balance (worksheet preparation)- the equality of debits and credits are
rechecked after adjustments are made.
serves as the basis for the preparation of Financial statements.
7. Preparing the Financial Statements- information processed in the accounting system is communicated to
users mainly through financial statements.
8. Closing the books- involves journalizing and posting closing entries and ruling the ledger.
Temporary accounts (nominal accounts) are closed and the resulting profit or loss is transferred to an
equity account
9. Preparing the Post-Closing Trial balance- the equality of debits and credits are again rechecked after the
closing process.
10. Recording of Reversing Entries- reversing entries are usually made at the beginning of the next accounting
period to simplify the recording of certain transactions in the next accounting period.
note: Steps 4,6,9 and 10 are optional. They are not required in the preparation of Financial Statement.
Accounting Records of a business entity
1. Business or Source Documents- these are the original source material evidencing a transaction. (sales invoice,
official receipts, vouchers, etc.)
2. Books of accounts- used under the single entry system include: cash books and subsidiary ledger(Personal
accounts)
Journal
Ledger

Systems of recording transactions

1. Double-entry system- each transaction is recorded in 2 parts- debit and credit.
Duality- this concept views each transactions as having a 2 folded effect on values- a value received and
a value parted with and each transaction is recorded using at least 2 accounts.
Equilibrium- this concept requires each transaction to be recorded in terms of equal debits and credits.
- Profit or loss determined through the “transaction approach” – profit or loss computed by the difference
between income and expenses.
- Accounts under this system are recognized as Asset, Liabilities, Equity, Income and Expenses.
- the books of account under this system are Journal, Special Journal, Ledger, Subsidiary Ledger
2. Single-Entry system- each transaction is recorded through simple narrative. Transactions are not analyzed in
terms of debit and credit.
- Profit or loss for the period is determined through the “Capital maintenance approach” by comparing the
beginning and ending balances of equity.
- Internal control is not enhanced because records are usually inadequate
- Accounts under this system include; Cash, Accounts Receivable, Accounts Payable and Equity.
Notes:
Journal are used only under the double-entry system because only this system utilizes debits and credits.
Subsidiary ledgers are used under both single and double entry system.
Accrual basis and cash basis of accounting can be applied under both systems. (Single and Double entry
system)
Under Accrual Basis, Income and Expenses are recognized when earned or incurred, regardless of when
cash is received or paid. Under Cash basis, income and expenses are recognized when received or paid,
regardless of when earned or incurred.
Journal- Journalizing is the process of recording transactions in the journal by means of journal entries.
- Book of Original entry- a formal record where transactions are initially recorded chronologically
through journal entries
Types of Journals
1. General Journal- a book of original entry used to record transactions other than those that are recorded in the
special journals. If special journals are not utilized, all transactions are recorded in the general journal.
2. Special Journal- a book of original entry used to record transactions of similar natures.
a. Sales Journal- .used to record sales on account
b. Purchases Journal- used to record purchases of inventory on account.
c. Cash receipts journal- used to record all transactions involving receipt of cash.
d. Cash Disbursement journal- used to record all transactions involving payment of cash.
note: Transactions that cannot be recorded in the special journals are recorded in the general journal. (Purchases
of inventory for notes payable, adjusting entries, reversing entries, etc.)

Types of Journal Entries

1. Simple Journal Entry- contains single credit.
2. Compound Journal Entry- contains 2 or more debits and credits.
3. Adjusting Entries- entries made prior to the preparation of financial statements to update certain accounts so
they reflect correct balances as at the designated time.
4. Closing Entries- entries made at the end of the accounting period after all adjustments been made to zero out
the balances of all nominal accounts and to update the retained earnings account.
5. Reversing Entries- usually made on the first day of the accounting period to reverse certain adjusting entries
in the immediately preceding period
6. Correcting Entries- entries made to correct accounting errors
7. Reclassification Entries- made to transfer an amount from one account to another account that better
describes the nature of the transaction being recorded.
Ledger- Posting is the process of transferring data from journal to the appropriate accounts in ledger.
-The purpose of posting is to classify the effects of transactions on specific asset, liability, equity,
income and expenses accounts in order to provide more meaningful information.
- Book of secondary entries or final entries- a systematic compilation of a group of accounts.

Kinds of Ledger.
A. General Ledger- contains all the accounts appearing in the trial balance.
B. Subsidiary Ledger- Provides a breakdown of the balances of controlling accounts.
-Controlling accounts (control account)- is one that consists of a group of accounts with similar
nature. The balance of this account is shown in the general ledger while the balances of the accounts that
comprise the controlling account are shown in the Subsidiary Ledger.
For examples the “Accounts Receivable “, account is a controlling account appearing in the general
ledger. This account is supported by various subsidiary accounts in the subsidiary ledger such as “accounts
receivable from customer A,” Account receivable from customer B,” etc. The sum of the subsidiary accounts
should be equal to the balance of the related controlling account in the ledger.
Account- the basic storage of information in accounting.
T-account Left side is Debit, Right side is Credit. T- account is useful in making accounting analyses.
Chart of Accounts- a list of all the accounts used by the entity.

Type of accounts
1. Real (permanent) Accounts- accounts that are not closed at the end of the accounting period, but rather
carried over to the next accounting period. This accounts are shown in the statement of financial position.
2. Nominal (Temporary) Accounts- are accounts that are closed at the end of the accounting period. These are
accounts include all income and expenses accounts, drawing and dividends accounts, clearing accounts (Income
summary account) and suspense accounts (cash shortage or overage account)
3. Mixed accounts- accounts that have both real and nominal accounts components. These are subject to
adjustment. It includes unadjusted prepayments and deferrals having both expired and unexpired components.
The expired portion is the nominal account component while the unexpired portion is the real account
component.
4. Contra accounts- accounts that are deducted from related account (accumulated depreciation)
5. Adjunct Accounts- accounts that are added to a related account (premium or bonds payable)
Trial Balance- is a list of general ledger accounts and their balances. It is prepared to check the equality of total
debit and total credit in the ledger. The preparation of the trial balance created a starting point for the
preparation of the financial statements.

Types of Trial Balance

1. Unadjusted trial balance- prepared before adjusting entries. Contains real, nominal and mixed accounts.
2. Adjusted Trial Balance- prepared after adjusting entries. Contains real and nominal accounts.
3. Post-closing trial balance- prepared after closing process. Contains real accounts only.

Errors revealed by trial balance

The Trial balance can reveal errors caused the total debits and total credits to be unequal.
1. Journalizing or posting one-half of an entry, (debit without credit or vice versa)
2. Recording one part of an entry at a different amount than the one part.
Committed when the number of digits in an amount is incorrectly increased or decreased.(1,000 to 100
or 10,000).
3. Trans-placement errors (slide error)- on one side of entry
4. Transportation error on one side of an entry.
committed when digits in an amount are interchanged (15,652 to 15,625)

Errors not revealed by a trial Balance.

Trial balance cannot reveal errors that do not cause the total debits and total credits to be unequal.
1. Omitting entirely the entry for a transaction.
2. Journalizing or posting an entry twice.
3. Using wrong account with the same normal balance as the correct account (debit to transportation expense is
erroneously debited to supplies expense.)
4. Wrong computation with the same erroneous amount posted ton the both debit and credit sides.
Note:
The effect of an error on the trial balance depends on the normal balance of the account involved.
An erroneous debit to an account with a normal debit balance will overstate that account; an erroneous
credit will understate that account.
An erroneous debit to an account with a normal credit balance will understate that account; an erroneous
credit will overstate that account.
Overstatement is corrected by Deduction while understatement is corrected by addition.
Correction is made on a “per account” basis, meaning if an error affects 2 accounts, 2 separate
corrections are made on those accounts.
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.
- Adjusting entries affect the comprehensive income for the period.

Purpose of Adjusting Entries .

a. to take up unrecorded income and expenses of the period (accruals for income and expenses)
b. to split mixed accounts into their real and nominal elements (adjustments to prepayments and unearned
income)
Methods of initial recording of income and expenses.
Income- advanced collection of income may initially be recorded using liability method or income method.
1. Liability Method- advanced collections of income are initially credited to a liability account. At the
end of the period, the earned portion is recognized as income while the unearned portion remains Liability.
2. Income Method- advanced collections of income are initially credited to an income account. At the
end of the period, the unearned portion is recognized as liability while the earned portion remains as income.
Expenses- Prepayments of expenses may initially be recorded using either asset method or expense method.
1. Asset Method- prepayments of expenses are initially debited to an asset account. At the end of the
period, the incurred portion (used up or expired) is recognized as expense while the unused portion remains as
asset.
2. Expense Method- prepayments of expense are initially debited to an expense account. At the end of
the period the unused portion (not yet incurred or unexpired) is recognized as asset.
Worksheet- an analytical device used to facilitate the gathering of data for adjustments and the preparation of
financial statements and closing entries.
- optional and not formal part of accounting records.
Heading of worksheet
1. Name of the entity
2. Title of the report
3. Date covered by the report
Notes:
The unadjusted trial balance contains real, nominal and mixed accounts.
The adjusted trial balance contains real and nominal accounts
The post-closing trial balance contains real accounts only.
In all trial balances, total debits equal total credits.
In the Income statement columns, if the total credits exceed total debits there is profit. If it is opposite
there is loss
In Statement of Financial Position columns (balance sheet), if total debits exceed total credits there is
profit if the opposite there is loss.
Financial statement- are the means by which the information accumulated and processed in financial accounting
is periodically communicated to the users. This is the end products of the accounting process.
A complete set of financial statement 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)
6. Additional statement of financial position (required only when certain instances occur)
Heading of financial Position
a. Name of the reporting
b. title of the financial statement
c. Reporting period.
Closing entries- closing the book is the process of preparing closing entries for nominal accounts and ruling and
balancing real accounts.
 -entries prepared at the end of the accounting period to “zero out” all temporary or nominal accounts in
the ledger. This is done so that the transactions in a period will not commingle with the next period’s
transactions.
- Application of periodicity concept.
Notes:
Only income statement accounts, those that enter into the determination of profit or loss are closed to the
income summary account
Income accounts are closed by debiting them. Expense accounts are closed by crediting them.
The dividends account is directly closed to retained earnings because dividends declared do not enter
into the determination of profit or loss. The dividends account is similar to the drawings account used in sole
proprietorship and partnerships. The dividends account may be used if dividend are declared more than once
within a year.
Accrued interest expense and accrued interest income are term used in traditional accounting that refer
to interest payable and interest receivable respectively. These are real accounts.
Unrealized gain- other comprehensive Income account is real account that is accumulated in equity.
Post-closing trial balance- is prepared in order to prove the equality of debits and credits in the ledger after the
closing process. It contains statement of financial position accounts only because all the income statement
accounts are already closed. The post-closing trial balance contains the balances that are extended to the next
accounting period.
Reversing Entries- entries usually made on the first day of the accounting period to reverse certain adjusting
entries in the immediately preceding period.
Purpose of reversing Entries
1. To facilitate recording of cash receipts and disbursement in the next accounting period
2. To promote convenience in recording the next period years-end adjustments for accruals
3. To promote consistency of accounting procedure.
Adjusting entries that may reverse.
- Not all adjusting entries may be reversed. Only adjusting entries made for the ff may reversed.
1. Accruals for income or expense
2. Prepayments initially recorded using the expenses method
3. Advanced collections initially recorded using the income method.
Note: Entities normally use the income method and expense method in recording cash receipts and cash
disbursements. When these methods are used, special consideration should be given when determining
adjusting entries because adjusting entries may vary depending on whether an entity prepares reversing entries
or not.
Summary
- The accounting cycle represents the steps or procedures used in recording transactions and preparing financial
statements.
- Journal (book of original entry) is a formal record where transactions are initially recorded. Journal entries are
then posted to the ledger (book of final entry)
- Ledger is a systematic compilation of a group of accounts
- Journals are used only under the double entry system
- subsidiary ledgers are used under both single and double entry system.
- Cash and accrual basis can be used under both systems
- Account is the basic storage of information in accounting
- Debit left side, Credit right side
- Chart of accounts is a list of all accounts used by the entity
- Trial Balance is a list of account and their balances. Used to checked the equality of debit and credit.
- Errors revealed by the trial balance are those that have caused the total debit and total credits to be unequal.
- All adjusting entries involve at least one statement of financial position account and one statement of
comprehensive income account. Adjusting entries are used to update the balances of accounts prior to the
preparation of financial statements
- Financial statements are means by which the information accumulated and processed in financial accounting is
periodically communicated to the users.
- Income is initially recorded using either (a) liability method (b) income method.
- Expenses are initially recorded using either (a) expense method (b) asset method
- Reversing entries may be made on the following (a) all accruals, (b) prepayments initially recorded using the
expense method. (c) unearned income initially recorded using the income method.

Trial Balance- Correct Debits and Credits

An entity’s trial balance has total Debit of 6,200 and total Credits of 6,550.
a. A credit to Account Receivable of 550 was not posted.
b. A 5,000 debit to be made to the purchases account was debited to Accounts Payable instead.
c. A 3,000 credit to be made to the Sales Account was credited to the Accounts Receivable account instead.
d. The Interest Payable account balance of 4,500 was included in the trial balance as 5,400
Compute for the correct balance of the trial balance.

Dr. Cr.
(Unadjusted Trial Balance) 6,200 6,550 (Unadjusted Trial Balance)
(a. Credit to A/R not posted) (550)

(b. Debit to purchase not made) 5,000 5,000 (erroneous debit to A/P)

(c. Erroneous Credit to A/R) 3,000 3,000 (Credit Sales Unrecorded)

(900) (Overstatement of Interest Payable

13,650 13,650
Analyzation
A.
Account affected: Accounts Receivable
Side of T-accounts to be corrected: Debit side because accounts receivable has a normal debit balance
Effect of error: A credit to accounts receivable decreases its balance. Failure to record the 550 decreases
overstates the account.
Correction side for accounts payable because accounts payable has a normal credit balance.
B.
Accounts affected: Purchases and Accounts Payable
Side of T-account to be corrected:
-Debit side for purchases because purchases has a normal debit balance.
- Credit side of accounts payable because accounts payable has normal credit balance.
Purchases
Effect of error: A debit to accounts payable decreases its balance. An erroneous 5,000 debit understates
the account.
Correction to be made: 5,000 additions on the credit side of the trial balance.
C.
Accounts effected: Sales and Accounts Receivable
Side of T-account to be recorded.
- Credit side for sales
- Debit side for Accounts Receivable
Sales
Effect of error: Failure to record the 3,000 credit to sales understates the account.
Correction to be made: 3,000 additions on the credit side of the trial balance.
Accounts Receivable
Effect of error: An erroneous credit to accounts receivable understates the account
Correction to be made: 3,000 addition on the debit side of the trial balance.
D.
Account affected: Interest Payable
Side of T-Account to be corrected: Credit Side
Effect of error: Overstatement of 900 (5,400 erroneous amount included- 4,500 corrected amount that
should have been included)
Correction to be made: 900 deduction on the credit side of the trial balance.

Liability Method VS. Income Method

A business rents out its building. On April 1, 20x1, the business receives 1-year rent in advance of
120,000. The rent per month is 10,000.
The receipt of the advance rent is recorded as follows:

Liability Method Income Method

April 1 20x1 April 1 20X1
Cash 120,000 Cash 120,000
Unearned rent 120,000 Rent Income 120,000
to record the receipt of 1-year rent in advance to record the receipt of 1-year rent in advance.

ADJUSTMENT ON DECEMBER 31,20X1

(Earned Portion-Income)
Before adjustments
90,000 (120,000x9/12)
April 1 to Dec. 31, 20x1
Mixed account
120,000 (unearned Portion-Income)
one year rent in advance 30,000 (120,000x3/12)
Jan. 1 to Mar. 31, 20x2
 Liability Method Income Method
Dec 31,20x1 Dec. 31 20X1
Unearned rent 120,000 Rent Income 120,000
Rent Income 120,000 Unearned Rent 120,000
to recognize the earned portion of the 1-year rent to recognize the unearned portion of the 1-year rent
income in advance

Asset method VS. Expense method

A business prepays 1-year insurance for 120,000 on October 1, 20x1. The prepayment of insurance
is recorded as follows:
Asset Method Expense Method
Oct 1,20x1 Oct 1 20X1
Prepaid insurance 120,000 Insurance Expense 120,000
Cash 120,000 Cash 120,000
to record the prepayment of 1-year insurance to record the prepayment of 1-year insurance.

(incurred portion-Expense)
30,000 (120,000x3/12)
Oct 1 to Dec. 31, 20x1
Mixed account
120,000
1-year prepaid insurance
(not yet incurred portion asset)
90,000 (120,000x9/12)
Jan 1 to Sept. 30, 20x2

Adjusting entries
Asset Method Expense Method
Dec 31,20x1 Dec 31 20x1
Insurance Expense 30,000 Prepaid Insurance 90,000
Prepaid Insurance 30,000 Insurance Expense 90,000
to recognize the expired portion of the 1-year to recognize the unexpired position of the 1-year
insurance insurance

Closing Entries
Dec. 31 20x1 Prepaid Insurance 10,000
Accrued Interest Expense 2,000
Cost of Goods Sold 170,000
Interest Income 20,000
Dividend Income 30,000
Unrealized gain-OCI 5,000
Income Summary 447,000
Dividends 12,000
 Sales 450,000
Operating Expense 200,000
Finance cost 2,000
Accrued interest 20,000
income
Retained earnings 447,000
Dec. 31, 20x1 Income Summary 447,000

1. The basic sequence in the accounting process can best be describe as

-Transaction, source document, journal entry, ledger account, trial balance.
2. Which of the following is not optional.
- Making adjusting entries
3. Which of the following statements correctly relate to the double and single entry systems of recording
- Double-entry system is sometimes known as the “transaction approach” of accounting for assets,
liabilities, equity, income, and expenses.
- Double-entry system is the generally acceptable method of bookkeeping because it offers a more
accurate and more complete profit or loss measurement compared to the single-entry.
4. Best interpretation of the word credit is
- Right side of an account
5. Best expresses the primary purpose of the general journal?
- The general journal provides a chronological listing of transactions in debit-credit form.
6. The journal is not directly useful.
- In locating and preventing errors
7. The Trial balance
- Provides a listing of all the accounts used by entity.
8. The premium on a 3-year insurance policy was paid in total on January 1, 20x1. Upon payment, prepaid asset
account was paid on December 31; thereof, the balance of prepaid asset account should be
- Higher, if the original payment had been debited initially to an expense account.
9. A prepaid expense can best be described as an amount that
- Paid and currently matched with revenues
10. Which of the following may be reversed in the next financial reporting period
- An adjusting entry to record bad debts expense on accounts receivable.
1. An entities unadjusted trial balance does not equal. The following information was determined.
a. Cash balance of 45,000 was erroneously extended to the trial balance as 54,000.
b. The debit posting for a 5,000 sale on account was omitted.
c. Prepaid rent balance of 34,000 was extended to the credit column of the trial balance.
d. depreciation expense of 16,000 was erroneously recorded as Rent expense.
e. Interest Payable with a balance of 4,000 was extended to the debit column of the trial balance.
How much is the difference between the total debits and total credits.

Dr. Cr.
54,000(cash) 18,000 (Prepaid rent)
16,000 (Rent Expense) (34,000 Prepaid Rent – 16,000 Rent Expense
4,000 (Interest Payable) = 18,000 Prepaid Rent)
74,000 18,000 56,000- difference
2. What is the net effect of the under mentioned errors on the trial balance of an equity?
a. Total of sales was taken as 58,726 instead of 58,762
b. A 52 discount given to a customer was not posted in the sales discount account.
c. Sale of old furniture of 130 was credited to Machinery account.
d. A credit sale of 250 was posted twice in the customer’s account.

(58,726 – 58, 726 = 36) 36 (sales)

250 (sale)
(52- discount )
=234 Excess debits
3. An entity’s trial balance has total debits of 15,100 and total credits of 14,500. The following errors were
determined