MODULE 3: THE ACCOUNTING CYCLE 1.

External Events

- (accounting process) a sequence of ▪ Transfers – transfers of resources

interrelated procedures, the primary and/or obligations from or to other
purpose of which is to produce the entity’s enterprises; includes exchanges
financial statements for a given reporting (reciprocral transfers) and non-
period. reciprocral transfers.
▪ Other Than Transfers – examples of
A. Steps in the Accounting Process:
these events are changes in interest
▪ Identify the events to be recorded. rates, change in market values, and
▪ Journalize transactions and events. changes in technologies.
▪ Post from journal to ledger.
- collection of accounts, sale of
▪ Prepare the unadjusted trial balance.
merchandise (reciprocal transfers);
▪ Journalize and post adjusting entries.
payment of taxes, withdrawal of
▪ Prepare adjusted trial balance.
owners/distribution of resources,
▪ Prepare financial statements.
payment of dividends, issuance of capital
▪ Journalize and post closing entries.
stock (non-reciprocal transfers)
▪ Prepare post-closing trial balance.
(optional)
▪ Journalize and post reversing entries.
2. Internal Events
- books of original entries (journal)
- those that only the entity participates;
- books of final entries (ledger) e.g., depreciation of PPE, consumption of
supplies for use in production,
- justification of preparing adjusting entries
casualtues that affect the entities
(application of the accrual basis of
resources and obligations.
accounting)
▪ Possible Effects of Reportable Events
- to summarize the transactions of the next
(based on the double-entry bookkeeping)
reporting period, preparation of post closing
− increase in asset, decrease in
entries of nominal accounts (income and
another asset
expense accounts) should be made,
− increase in asset, increase in liability
bringing them to 0 balances.
− increase in asset, increase in equity
- post-closing trial balance; journalizing and − decrease in asset, decrease in
posting of reversing entries (optional) liability
− decrease in asset, decrease in equity
- purpose of reversing entries (prepared at
− increase in liability, decrease in
the beginning of the new accounting
equity
period): convenience
− increase in liability, decrease in
a. Identification of Economic Events to be another liability
Recorded – reportable events are those that − decrease in liability, increase in
affect the elements of financial statements. equity
 − increase in equity, decrease in equity − general journal (all other
transactions)

b. Journalizing Transactions and Events

- (journalization) process of recording the
economic events in the books of original
entry called journal. (using the double entry
bookkeeping system – debit/credit)
- generally, the company designs its special
journals fitting the needs of the company.
(not standardized; what is more convenient)
- even if the company uses special journals,
entities should still maintain a general
journal for recording adjusting entries,
closing entries, and reversing entries.
▪ Types of Special Journals
a. Under the non-voucher system:
− sales journal (sale of merchandise
on account)
− cash receipts journal (receipt of
cash)
− purchase journal (purchase of
merchandise on account; may also
include cash purchases)
− cash disbursements journal
(payment of cash)
− general journal (all other
transactions)
- use of vouchers is an internal control
ensuring the authorized payment of cash;
voucher register maintains all potential
payments; does not use the account of
accounts payable (using vouchers payable
instead)
- converted back to accounts payable upon
preparation of financial statements.
- e.g., purchase of merchandise on
account:
Purchases XX
Vouchers Payable XX
- upon payment of voucher, it is lifted in the
folder from unpaid to paid vouchers file;
even for an entity that has a digitized
accounting system.
- upon payment of vouchers, the entity will
issue checks which will be recorded in the
check register. (sequential recording; easier
bank reconciliation)
- purchase journal = voucher register; cash
disbursements journal = check register.
- (digitized accounting system) use of point-
of-sale. (POS)

b. Under the voucher system:

− sales journal (sale of merchandise
on account)
− cash receipts journal (receipt of
cash)
− voucher register (all potential
payments)
− check register (issuance of checks)
c. Posting from Journal to Ledger
- (posting) process of transferring the
entries from the journal to the ledgers.
- process of classifying the effects of the
transactions based on individual accounts.
- general ledger (basis of preparing FS)
- subsidiary ledger (controlling the details of
the account balances)
- theoretically, all accounts in the general
ledger may have corresponding subsidiary
ledgers; but it is only limited to accounts
that have multiple transactions for a certain
company to avoid inconvenience.
- subsdiary ledgers for AP, AR, Inventory,
PPE (recording of depreciation)
- usually, subsidiary ledgers are provided
for accounts with customers (receivables)
and suppliers (payables)
d. Preparation of Trial Balance
- (preparation of trial balance) control to
ensure that the journal entries and posting
was correctly done; but does not totally
ensure the correctness of every process
done.
- a proof of the equality of the debits and
credits in the general ledger; totals serve no
meaningful purpose.
e. Adjusting Entries
- (adjusting entries) not prepared exactly at
the last day of the reporting period; however,
if it is not prepared exactly on the last day, it
is still dated on the last day of the reporting
period.
- based on the accrual basis of accounting;
revenues and expenses are recognized in
the accounting period in which they are
considered earned and incurred, regardless
of the inflow our outflow of cash.
▪ Types of Adjusting Entries
− ending inventory under the periodic
inventory system
- decline of inventory based on the lower
of cost and net realizable value
(adjustment that may be applicable to
entities applying the perpetual
inventory system)
− accruals, which include accrual of
expense and income
− deferrals, which include prepaid
expenses and unearned income
− depreciation of property, plant, and
equipment; amortization of
intangibles
− impairment of assets
− remeasurement of financial assets
- an adjusting entry affects at least one
nominal account and one real account.
(entries affecting both nominal or real
accounts may only be correcting entries or
reclassification)
- nominal (SCI); real (SFP)
- (nominal account) one whose balance is
brought to zero at the end of the reporting
period; includes income, expense,
dividends, and drawings accounts.
- (real account) one whose balance is
brought forward to the next accounting
period; accounts reported in the SFP.
f. Adjusted Trial Balance
- lists the adjusted balances of all general
ledger accounts that are to be presented on
the company’s financial statements;
omitted step with the use of the worksheet.
g. Preparing the Financial Statements • Adjusting Entries
• Preparing Financial Statements
- the finished products of the accounting
• Posting of Adjusting Entries
procees; means by which financial
• Post Closing Entries
information about an enterprise is
• Reversing Entries
communicated to the users.

- phases in the accounting cycle: (1)

h. Closing Entries recording, (2) classifying, (3) summarizing,
(4) interpreting.
- those prepared at the end of the
accounting period, after journalizing and ▪ recording (identify events, journalize
posting the adjusting entries, to bring transactions, posting = final
nominal accounts to zero balances, so that recording)
they will accumulate again the effects of the ▪ posting is in between the recording
transactions in the next accounting period. and classifying phases.

- journal and ledgers (two books of accounts

of an entity)
i. Post-Closing Trial Balance

- third trial balance after bringing the

nominal accounts to zero balances; only the
real accounts are listed. (optional step)

j. Reversing Entries

- (reversing entries) dated first day of the

reporting period; there may be no need to
monitor the effects of certain adjustments
in the account balances.

1. accrued expense
2. accrued income
3. prepaid expense (expense method)
4. unearned income (income method)

- with the use of worksheet, the steps in

accounting process changes.

• Identification of Events
• Journalization of Transactions
• Posting to Ledger
• Preparing Unadjusted Trial Balance
MODULE 4: PRESENTATION OF FINANCIAL
STATEMENTS
- central objective of IAS 1: comparability.
- to prescribe the basis for presentation
of general purpose financial statements,
to ensure comparability both with
financial statements of previous periods
(intra-comparability) and with the
financial statements of other entities.
(inter-comparability)
- sets out the overall requirements for the
presentation of financial statements.
- complete set of financial statements: (1)
SFP, (2) SCI, (3) SCE, (4) SCF, and (5) notes to
the financial statements.
- changes in the comparative information of
the preceding period with respect to: (1)
change in accounting policy, (2)
reclassification in the FS elements, (3)
correction of prior period errors.
- statement of financial position as at the
beginning of the preceding period when
an accounting poilicy is applied
retrospectively or when retrospective
restatement is made, or when a
reclassification is made.
- if the period end is December 31, 2022,
the prior period is 2021, provide the
beginning balances as of January 1,
2021 or December 31, 2020.
- the following are outside the scope of IAS
1:
• financial review by the management
− factors and influences
determining financial
performance
− source of funding and targeted
financial ratios
− resources not recognized in the
balance sheet.
• environmental reports
• value-added statements
General Features:
a. Fair Presentation and Compliance with
PFRS – achieved by:
- selecting accounting policies in
accordance with the hierarchy set out in
IAS 8: (1) consider whether a PFRS
standard specifically applies, (2)
consider whether PFRS standards deal
with similar and related issues, (3) refer
to and consider the applicability of the
Conceptual Framework in formulating
accounting policies.
- presenting information that is relevant,
reliable, comparable, and understandable
- providing additional disclosures (may
not be explicitly required by the
standards but the entity believes in
disclosing such information), when
necessary (judgment is needed)
- note: an entity whose financial
statements comply with PFRS shall
make an explicit and unreserved
statement of such compliance in the
notes.
Departure from Specific IFRS:
- only in extremely rare circumstances.
(when the entity deems impairment of
comparability and relevance)
• management concludes that
compliance would result to
 misleading information but relevant
regulatory framework prohibits
departure (e.g., regulations of BSP)
• the entity should reduce the
misleading aspects by disclosing the
specific PFRS and the nature of the
requirement and the reason why
compliance may result to misleading
information
• the entity should present the
adjustment necessary to achieve fair
presentation.
b. Going Concern – an entity preparing PFRS
financial statements are presumed to be a
going concern. (default)
- if management has significant concerns
about the entity’s ability to continue as a
going concern, the uncertainties must be
disclosed.
- if management concludes that the
entity is not a going concern, the financial
statements should not be prepared on a
going concern basis, in which case IAS 1
requires a series of disclosures.
- requires changes in measurement
basis: e.g., PPE items measures at cost
less accumulated depreciation may be
tested for impairment.
c. Accrual Basis of Accounting – all financial
statements (except SCF) shall be prepared
using the accrual basis.
- financial statement elements are
recognized when they satisfy the
definition and recognition criteria under
the Conceptual Framework.
- SCF: does not apply the accrual basis of
accounting. (cash basis)
d. Materiality and Aggregation – the primary
purpose is to enhance the understandability
of financial information.
- each material class of similar items
shall be presented separately.
- aggregate those items not individually
material, taking all considerations such
as the nature and function of the items.
e. Offsetting – assets and liabilities, and
income and expenses, may not be offset
(generally) unless required or permitted by a
standard or an interpretation.
- netting, however, is different from
offsetting. (e.g., items of PPE net of
accumulated depreciation and
accumulated impairment)
- IAS 12 (Income Taxes) permits
offsetting of deferred tax asset and
deferred tax liability in certain
circumstances:
• they arise from taxes levied only
by one taxing authority, and
• they are expected to reverse
simultaneously
f. Frequency of Reporting – financial
statements shall be presented at least
annually. (longest period to cover is 1 year)
- when an entity changes the end of its
reporting period and presents financial
statements for a period longer or shorter
than one year, it shall disclose:
• the reason for using a longer or
shorter period
• the fact that the amount
presented are not entirely
comparable
g. Comparative Information – comparative A. Statement of Financial Position
information on the face of the financial
statements as well as in the notes (narrative
and descriptive) shall be presented for the B. Statement of Comprehensive Income
preceding period.

- additional comparative information may

C. Earnings Per Share
likewise be presented, in which case, the
entity shall present related note
information for those additional
D. Statement of Cash Flows
statements.

h. Requirement for a Third SFP – dated as of

the beginning of the preceding period and
restated in form and amount of FS
elements.

- required when there is:

• retrospective application of an
accounting policy
• reclassification of a FS item
(disclose nature, amount, and
reason; IAS 8)
• remeasurement of an item
(because of a prior period error
corrected)

i. Structure and Content of FS – distinguish

clearly the FS if presented with other
information in the same published
document.

- the following shall be prominently

displayed:

• name of reporting entity

• whether the reporting entity is
individual or group
• reporting date and reporting
period
• presentation currency
• level of rounding used
(truncation)