ACCOUNTING

CYCLE
 ACCOUNTING CYCLE

T-Account
Posting to the ledger
Journal Entries
Adjusting Entries
Worksheet
Closing Entries
Reversing Entries
 The Accounting Cycle

The sequence of
activities beginning
with the occurrence
of a transaction
 STEP 1 STEP 2
Identify the Analyze the
Transaction
Transaction
Determine the transaction
Optional Identify the event as a amount., which accounts are
transaction and generate the affected, and in which STEP 3
Reversing Entries
source transaction direction Journal Entries
Cancel out the adjusting entries that
were made to accrue revenues and The transaction is
expenses at the end of the previous
accounting. recorded in the journal
with a debit and a credit.

STEP 10 STEP 4
After-Closing Trial Post to Ledger
Balance
A trial balance is calculated
after the closing entries are
ACCOUNTING CYCLE The journal entries are
transferred to the appropriate
made T-account in the ledger.

STEP 9 STEP 5
Closing Entries Trial Balance
Transfer the balance of the Is calculated to verify that the
temporary accounts (e.g. sum of the debits is equal to
revenues and expenses) to the sum of the credits.
owner’s equity.

STEP 6
STEP 8 STEP 7 Adjusting Entries
Adjusted Trial
Financial Statements Balance Made for accrued and deferred
items. The entries are journalized
The financial statements are A new trial balance is and posted to the T-accounts in
prepared calculated after making the the ledger.
adjusting entries.
 BASIC FORM OF ACCOUNT
• The simplest form an account consists of
1 the title of the account
2 a left or debit side
3 a right or credit side
• The alignment of these parts resembles the
letter T = T account
Title of Account
Left or debit side Right or credit side

Debit balance Credit balance

T - ACCOUNT
ACCOUNT NAME
 THE RECORDING PROCESS
1 analyze each transaction (+, -)
2 enter transaction in a journal
3 transfer journal information to ledger
accounts
 THE JOURNAL
• Transactions
• Are initially recorded in chronological order
before they are transferred to the ledger
accounts.
• A general journal has
1 spaces for dates
2 account titles and explanations
3 references
4 two amount columns
 Journal Entries
• The general journal is where double
entry bookkeeping entries are recorded
by debiting one or more accounts and
crediting another one or more accounts
with the same total amount. The total
amount debited and the total amount
credited should always be equal,
thereby ensuring that the accounting
equation is maintained. It is known as
the book of original entry.
 General Journal

Year GL
Transaction Details Debit Credit

Month Day Ref

March 30 Account Name xx xxxx

Account Name xx xxxx

Description of the transaction

Name of the Name of the

Account Debited Account Credited Amounts
Debited/Credited
Short
Description of
General Ledger
transaction
account number
 Posting to the ledger
The ledger is a book of final entry
summarizing all of a company's financial
transactions, through offsetting debit and
credit accounts.
The first column includes date,
second column – description of transaction,
Third and fourth – debit and credit columns,
and the last one – balance of the account
after the transaction has been posted.
 Posting to the ledger

Account Name (General Ledger)

Year Transaction Details Debit Credit Balance

Month Day
March xx Transaction Name xxxx xxxx
March xx Transaction Name xxxx xxxx
March xx Transaction Name xxxx xxxx
 Unadjusted Trial Balance.
• A trial balance is a bookkeeping worksheet in
which the balances of all ledgers are
compiled into debit and credit columns.
• A company prepares a trial balance
periodically, usually at the end of every
reporting period.
• The general purpose of producing a trial
balance is to ensure that the entries in a
company's bookkeeping system are
mathematically correct.
 THE TRIAL BALANCE

The Steps in preparing the Trial

Balance are:

1. List the account titles and balances

2. Total the debit and credit columns
3. Prove the equality of the two
columns
 A TRIAL BALANCE
PIONEER ADVERTISING AGENCY
Trial Balance
October 31, 2005

Debit Credit
Cash $ 15,200
Advertising Supplies 2,500
Prepaid Insurance 600
Office Equipment 5,000
Notes Payable The total debits $ 5,000
Accounts Payable must equal the 2,500
Unearned Fees 1,200
C. R. Byrd, Capital
total credits. 10,000
C. R. Byrd, Drawing 500
Fees Earned 10,000
Salaries Expense 4,000
Rent Expense 900
$ 28,700 $ 28,700
 LIMITATIONS OF A TRIAL BALANCE

• A trial balance does not prove all transactions

have been recorded or the ledger is correct.

• Numerous errors may exist even though the trial

balance columns agree. For example, the trial
balance may balance even when:
• a transaction is not journalized
• a correct journal entry is not posted
• a journal entry is posted twice
• incorrect accounts used in journalizing or
posting
• offsetting errors are made in recording
 Name of the Company
Worksheet
For the month ended month, Year
Adjusted Trial
Account Title Trial Balance Adjustments Balance Income Statement Balance Sheet
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash xxx
Accounts Receivables xxx
Supplies xxx
Salaries Payable xxx
Accounts Payable xxx
Unearned Revenue xxx
Common Stock xxx
Service Revenue xxx
Supplies Expense xxx
Salaries Expense xxx
Miscellaneous
Expense xxx

xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx
Net loss xxx xxx
Totals xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx
 Adjusting Entries.
• These are bookkeeping entries posted at the end
of an accounting period (the balance sheet date)
to assign expenses to the period in which they
were incurred, and revenue to the period in
which it was earned.
• Adjusting entries are used also to correct entries
that could not be accurately made earlier.
• After adjusting entries are made in the accounting
journals, they are posted to the general ledger in
the same way as any other accounting journal
entry.
 Adjusting Entries.
1. Accrued Revenues – If you perform a
service for a customer in one month, but
don't bill the customer until the next month,
you would make an adjusting entry showing
the revenue in the month you performed the
service.

Journal Entry:
Accounts Receivables xxx
Service Revenue xxx
 Adjusting Entries.
2. Accrued Expenses – A good example of
accrued expenses is wages paid to employees.
Journal Entry:
Wages Expense xxx
Wages Payable xxx

3. Unearned Revenues – Refer to payments for

goods to be delivered in the future or services to be
performed.
Journal Entry:
Unearned Revenue xxx
Revenue xxx
 Adjusting Entries.
4. Prepaid Expenses – Assets that are paid for and
gradually get used up during the accounting period.
Journal Entry:
Office Supplies Expense xxx
Prepaid office Supplies xxx
5. Depreciation – It is the process of allocating the
cost of an asset, such as building or a piece of
equipment, over the serviceable or economic life of
the asset.
Journal Entry:
Depreciation Expense - Equipment xxx
Accumulated Depreciation xxx
 Adjusting Entries.
6. Uncollectible Accounts – Business sometimes
make transactions any extending credit to the
customers.
Journal Entry:
Uncollectible Accounts Expense xxx
Allowance for uncollectible Accounts xxx

7. Inventory Adjustment – This becomes

necessary in order to recognize the proper
amount of asset cost in order to gain or make
revenue.
Journal Entry:
Cost of Sales xxx
Inventory xxx
 Transaction/Adjustments Debit Credit
Expense Item
a. Prepaid Expenses
Prepaid Expenses
Receivables
b. Accrued Revenue
Revenue

c. Property and Equipment Depreciation Expense

Depreciation
Accumulated Depreciation
Unearned Revenue
d. Unearned Revenue
Revenue
Expense Item
e. Accrued Expenses
Accrued Item
f. Inventory Used During Expense Item
Sale Accrued Item
Uncollectible Accounts
Expense
g. Uncollectible Accounts
Allowance for
Uncollectible Accounts
 Adjusting Trial Balance
This is the trial balance after adjustments
have been made.
Rule :
• An Account is with a debit balance and debit
adjustment, the final balance is debit.
• An Account is with a credit balance and credit
adjustment, the final balance is credit.
• An Account is with a debit balance and credit
adjustment, the final balance is either a debit or
credit.
 Financial
statements
Consists of both the balance
Sheet and Income Statement.
 Closing entries
At the end of the accounting period, the balances is
temporary accounts such as the income and
expenses are transferred to an income summary
account and an equity account, (Capital-Sole
proprietorship or partnership and Retained earnings-
Corporations), thereby resetting the balance of the
temporary accounts to zero to begin the next
accounting period.
A closing entry is made also to the withdrawal
account directly against the equity account.
First, the Revenue Accounts are closed by
transferring their balances to the income
summary account.
Example : September 30 is the end of the
accounting period. If the revenue account
balance is P 2,200, then the closing journal
entry would be:
Date Accounts Debit Credit

9/30 Revenue 2,200

Income Summary 2,200
Second, the Expense Accounts are closed by
transferring their balances to the income
summary balances
If the Expense account balance is P 1,325, then
the closing entry would be:

Date Accounts Debit Credit

9/30 Income Summary 1,325

Expense 1,325
At this point, the net balance of the income
summary is a P 875 credit (means that there is
an income). The income summary account
then is closed to Capital Account (if this is a
Sole Proprietorship or Partnership):
Date Accounts Debit Credit

9/30 Income Summary 875

Capital 875
• Net Loss
Date Accounts Debit Credit

9/30 Capital 875

Income Summary 875
Finally, let us assume that P 650 was
withdrawn by the owner. The Withdrawal
Account is then closed to Capital as
follows:
Date Accounts Debit Credit

9/30 Capital 650

Withdrawal 650
 Reversing entries
At the beginning of the accounting period,
some accountants use reversing entries
(optional) to cancel out the adjusting entries
that were made to accrue revenues and
expenses at the end of the previous accounting
period.
Reversing entries make it easier to record
subsequent transactions by eliminating the
need for certain compound entries.