FINANCIAL ACCOUNTING AND REPORTING
the process of transferring data from the
Our Lady of Fatima University – Antipolo
Campus
(Midterm Reviewer)
CHAPTER 6: BUSINESS TRANSACTIONS & THEIR
ANALYSIS
Steps in the Accounting Cycle
1. Identifying and analyzing
2. Journalizing
3. Posting
4. Unadjusted trial balance
5. Adjusting entries
6. Adjusted trial balance (and/or Worksheet)
7. Financial statements
8. Closing entries
9. Post-closing trial balance
10. Reversing entries
Identifying and analyzing transactions and
events
• Only accountable events are recorded.
Accountable events are those that affect the
assets, liabilities, equity, income or expenses of
the business.
• Accountable events are normally identified
from source documents, such as sales invoice,
official receipts, delivery receipts, and the like.
Types of Events
1. External events – are transactions that
involve the business and another external party.
2. Internal events – are events that do not
involve an external party.
Journalizing
Journalizing refers to recording an identified
accountable event in the journal by means of a
journal entry.
Simple and Compound Journal Entries
• Simple Journal Entry – contains a single debit
and a single credit element.
• Compound Journal Entry – contains two or
more debits or credits.
CHAPTER 7: POSTING TO THE LEDGER
POSTING
Posting, the third step in the accounting cycle, is
journal to the appropriate accounts in the
ledger.
TRIAL BALANCE
• A 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.
Types of Trial balance
a. Unadjusted trial balance – this is prepared
before adjusting entries are made.
b. Adjusted trial balance – this is prepared after
adjusting entries but before the financial
statements are prepared.
c. Post-closing trial balance – this is prepared
after the closing process.
Errors revealed by a trial balance
1. Journalizing or posting one-half of an entry,
i.e., a debit without a credit, or vice versa.
2. Recording one part of an entry for a different
amount than the other part.
3. Errors of Transplacement (Slide error) on
one side of an entry.
4. Error of Transposition on one side of an
entry.
Errors not revealed by a trial balance
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.
4. Wrong computation with the same erroneous
amounts posted to debit and credit sides.
CHAPTER 8: ADJUSTING ENTRIES
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.
Purpose of adjusting entries:
a. To take up unrecorded income and expense
of the period.
b. To split mixed accounts into their real and
nominal elements.
Real, Nominal and Mixed Accounts
a. Real Accounts (Permanent accounts) –
accounts that are not closed at the end of the
accounting period. These accounts include all
balance sheet accounts, except the “Owner’s
drawings” account.
b. Nominal Accounts (Temporary accounts) –
accounts that are closed at the end of the
accounting period. These accounts include all
income statement accounts, drawings account,
clearing accounts and suspense accounts.
c. Mixed accounts – accounts that have both
real and nominal account components. These
accounts are subject to adjustment.
Methods of Initial Recording of Income
1. Liability method – under this method, cash
receipts from items 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 as
liability.
2. Income method – under this method cash
receipts from items 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.
Methods of Initial Recording of Expenses
1. Asset method – under this method cash
disbursements for items 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 – under this method, cash
disbursements for items of expenses 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
while the incurred portion remains as expense.
CHAPTER 9: ACCOUNTING CYCLE OF A SERVICE
BUSINESS
WORKSHEET
A worksheet is an analytical device used to
facilitate the gathering of data for adjustments,
the preparation of financial statements, and
closing entries.
FINANCIAL STATEMENTS
• The financial statements are the end product
of the accounting process. Information from the
journal and the ledger are meaningless to most
users unless they are summarized and
communicated through the financial
statements.
The major processes in accounting are:
 Journalizing
 Posting
 Financial Statements
 Recording
 Classifying
 Summarizing and Communicating
• Statement of financial position (or Balance
sheet) – shows information on assets, liabilities
and equity.
• Statement of profit or loss (or Income
statement) – shows information on income and
expenses, and consequently, the profit or loss
for the period.
CLOSING ENTRIES
• Closing entries are entries prepared at the
end of the accounting period to “zero out” all
nominal accounts in the ledger. This is done so
that the transactions during the period will not
commingle with the transactions in the next
period.
• Closing entries are prepared as follows:
a. All income accounts are debited and all
expense accounts are credited. The resulting
balance is recorded in a clearing account called
the “Income summary.”
b. The balance of “Income summary” is closed
to the “Owner’s capital” account.
c. Any balance in the “Owner’s drawings”
account is closed to the “Owner’s capital”
account.
REVERSING ENTRIES
• Reversing entries are entries usually made on • Purchase discounts – the account used to
the first day of the next accounting period to record cash discounts availed of on the
reverse certain adjusting entries made in the purchased goods.
immediately preceding period. Gross Profit
Adjusting entries that may be reversed: Net Sales – Cost of Goods Sold = Gross Profit
1. Accruals for income or expense. • Sales – include both cash sales and credit
2. Prepayments initially recorded using the sales.
expense method. • Sales returns – the account used to goods sold
3. Advanced collections initially recorded using but were returned by customers.
the income method. • Sales discounts – the account used to record
CHAPTER 10: ACCOUNTING CYCLE OF A cash discounts given to and taken by customers.
MERCHANDISING BUSINESS Statement of Cost of Goods Sold and Gross
Merchandising Business Profit
• A merchandising business is one that buys and
sells goods, in their original form and without
any further processing. Those goods
are referred to as merchandise inventory
(or simply, inventory).
Inventory Systems
a. Perpetual inventory system – under this
system, the “Inventory” account is updated
each time a purchase or sale is made. Thus,
the “Inventory” account shows a continuing or
running balance of the goods on hand.
b. Periodic inventory system – under this
system, the “Inventory” account is updated only
when a physical count is performed. Thus, the
amounts of inventory and cost of goods sold are
determined only periodically.
Beginning inventory + purchases − ending
inventory = cost of goods sold
Net Purchases= Purchases + Freight-in – Returns
– Allowances – Discounts
Accounts used under Periodic System
• Purchases – the account used to record
purchases of inventory under the periodic
system.
• Freight-in (Transportation-in) – the account
used to record the shipping costs incurred on
purchases of inventory under the periodic
system.
• Purchase returns – the account used to record
returns of purchased goods to the supplier.