CHAPTER 4 1.
It has been a practice that before
INTRODUCTION
The definition of Accounting enumerates
its four (4) different phases. It is
therefore with the process of Accounting
that the Accountant can provide relevant
information (in the form of financial
statements) to the owners and executive
management team, so that they can
make appropriate decisions for running
the business.
Thus, the accounting cycle is the means
for ensuring that these financial
statements are promptly prepared and
must contain relevant and accurate
information needed for management’s
guide in their decision-making process.
ACCOUNTING CYCLE
What is an accounting cycle?
The accounting cycle is a system of
recording, processing, summarizing, and
communicating all financial transactions
of a business, in a uniform and consistent
manner.
It starts when a transaction occurs, and
concludes with its representation on the
financial statements. At this time, the
cycle concludes and steps are taken to
begin the next accounting cycle, signaling
the start of the next accounting period.
the business starts its operations,
the accountant must prepare a
CHART OF ACCOUNTS (please
see sample). It is a list of account
names and numbers to be used
by the business. It will serve as
the guide of the accounting
practitioners in recording the
transactions of the business.
2. And prior to the first step of the
STAGES OF ACCOUNTING CYCLE
accounting cycle, the accounting
personnel has to perform another
procedure – that is to IDENTIFY 1. Transaction Analysis
THE TRANSACTIONS (and This step aims to gather information
analyze these transactions). In about the transactions or events generally
this procedure, the following through the source documents.
questions are being considered:
The source documents identify and
a. Is the transaction related to the describe transactions and events entering
business (official)? the accounting process. They contain
b. Is the transaction supported with information about the nature and amount
legitimate source document? of the transactions. These are also the
c. What will be the accounts affected bases for the journal entries.
with this transaction?
Examples of source documents are bills
If all these questions are properly and invoices, official receipts, bank
addressed then the accounting personnel statements, checks, vouchers, filed tax
will start to perform the first step of the forms, etc.
accounting cycle.
ACCOUNTS, DEBITS, AND CREDITS
SAMPLE OF A CHART OF ACCOUNTS
THE ACCOUNT
CHART OF ACCOUNTS
▪ record of increases and decreases
▪ a numbering system of accounts in a specific asset, liability, or
that lists the account titles and owner’s equity item
account numbers to be used by ▪ debit = “left”
the company ▪ credit = “right”
 ▪ recording done by debiting at
least one account and crediting at
least one other account
▪ DEBITS must equal CREDITS
Effect of debits and credits on revenue
accounts is the same as effect on
Owner’s Capital
Expenses have opposite effect.

SUMMARY OF DEBIT / CREDIT RULES

DEBITS AND CREDITS

If the sum of Debit entries are greater

than the sum of Credit entries, the
account will have a debit balance. ASSETS – accounts normally show debit
balances

If the sum of Credit entries are greater
than the sum of Debit entries, the
account will have a credit balance.
LIABILITIES – accounts normally show
credit balances Debit / credit rules and effects on each
type of account.
NORMAL BALANCE is on the increase
side

Equation must be in balance after every

transaction.
OWNER’S INVESTMENTS and
REVENUES increase owner’s equity Total Debits must equal total Credits.
(credit)
QUESTION 1.
OWNER’S DRAWINGS and EXPENSES
decrease owner’s equity (debit) Debits:

a. Increase both assets and

liabilities
DEBIT AND CREDIT PROCEDURE b. Decrease both assets and
liabilities
Double-entry System
c. Increase assets and decrease
▪ each transaction must affect two liabilities
or more accounts to keep basic Earning revenues is to benefit owner(s) d. Decrease assets and increase
accounting equation in balance liabilities
 With the double-entry bookkeeping credit amounts for each entry can
system, this would involve a JOURNAL be easily compared
QUESTION 2. ENTRY.
Accounts that normally have debit The journal entry is actually the formal
balances are: recording of the transaction analysis JOURNAL ENTRY

a. Assets, expenses, and revenues made in the Identification of Transactions THREE PARTS OF A JOURNAL ENTRY:
b. Assets, expenses, equity procedure. There are two types of journal
c. Assets, liabilities, and owner’s entry: (1) Debit entry
drawings (2) Credit entry
1. SIMPLE JOURNAL ENTRY – it (3) Brief explanation.
d. Assets, owner’s drawings, and has one debit and one credit
expenses entries. Both the debit and credit entries have
2. COMPOUND JOURNAL ENTRY – their corresponding debit and credit
2. Journalizing it has two or more debit and two amounts.
THE JOURNAL or more credit entries.
While the brief explanation is a narrative
The Recording Process But whatever types of journal entry is explanation on the transaction which
used, the total debits MUST ALWAYS involves the journal entry.
▪ Analyze transaction equal to the total credits.
▪ Enter transaction in journal BASIC RULES IN JOURNALIZING:
▪ Transfer journal information to Traditional journal entry format dictates
that debited accounts are listed before A. Journalizing of transactions must
ledger accounts be in chronological order.
credited accounts. Each journal entry is
JOURNALIZING or otherwise called also accompanied by the transaction B. The journal entry must follow the
RECORDING (first phase of accounting) date, title, and brief explanation of the following format:
is the process of recording the events or transaction.  Debit entry must be
transactions of the business in written first and the
chronological order using the GENERAL ▪ The Journal is the book of account title must start at
JOURNAL or JOURNAL. Transactions are original entry the left side corner of the
recording using the double-entry ▪ Transactions recorded in cell.
bookkeeping system, whereby at least chronological order  Credit entry must follow
one account is debited, and one account ▪ Contributions to the recording after all debit entries are
is credited. process: written.
a. Discloses in one place the  Credit account titles must
JOURNAL is the special accounting books complete effects of a be indented and must not
used in the first step of the accounting transaction align with the debit
cycle. It is commonly called the book of b. Provides a chronological record account titles.
original entry. of transactions  The explanation must also
c. Helps to prevent or locate be indented and not to
errors because the debit and
 align the credit account THE LEDGER
titles. ▪ Each page of the journal must be
 When writing the date: numbered. ▪ Entire group of accounts
o The Year must be ▪ The posting reference will be filled up maintained by a company
during the cross referencing of ▪ Provides the balance in each
written on the
entries. account
uppermost of the
▪ To properly separate the entry for ▪ keeps track of changes in account
cell, while the
each day, a space may be provided balances
month must be
below the year every after each journal entry. After journal entries are made, the next
and the day on step in the accounting cycle is posting
SAMPLE OF A JOURNAL WITH THE
the proper column the journal entries into the GENERAL
JOURNAL ENTRIES:
of the cell. LEDGER or LEDGER.
o The year and the
month must only Posting refers to the process of
be written on the transferring entries in the journal into
first account title the accounts’ ledger. Posting to the
of the page. ledger is otherwise known as classifying.
o If there are Therefore for each account name there
various has to be one (1) ledger exclusively for
transaction of the the specific account.
same day then
While the journal is the book of original
the day must not
entry, the ledger is called the book of
be repeated or SIMPLE AND COMPOUND ENTRIES:
final entry.
written again.
 Money columns must be The ledger shows the debit and credit of
properly used. each account posted according to the
date of the transactions in the journal.
THE GENERAL JOURNAL
The running balance of these accounts
It is the book of the original entry can immediately be seen in the ledger.
because it contains the original record of Illustration: On July 1, Butler Company General ledger contains all asset,
the business transaction. purchases a delivery truck costing liability, and owner’s equity accounts.
$14,000. It pays $8,000 cash now and
COLUMNS OF THE GENERAL JOURNAL:
agrees to pay the remaining $6,000 on
1. DATE account (to be paid later).
2. PARTICULARS
3. POSTING REFERENCE
4. DEBIT (AMOUNT) 3. Posting
5. CREDIT (AMOUNT)
 Page No. of the journal on the
Folio column in the ledger.
(5) The debit amount of a journal
entry should also be posted on
the debit column of the ledger,
while the credit amount on the
credit column of the ledge.
(6) Every after posting the
transactions on the ledger,
The general ledger or ledger shows the
running balance is immediately
debit and credit of each account posted
computed.
according to the date of transactions in
(7) Do not write the year and month
the journal. The running balance of these
and the day on the same page if
accounts can immediately be seen in the
transaction is the same with the
ledger.
previously posted transaction.
The parts of a General Ledger: (8) Ledgers must be arranged
according to the account
1. Account Name numbers. While the account
2. Account Number numbers must be in accordance
3. Date to the assigned numbers in the
4. Folio Chart of Accounts.
5. Particulars (9) The PR (Posting Reference in the
6. Debit column QUESTION 1.
Journal) answers the question:
7. Credit column “Where are you transferring this Posting:
8. Balance column entry?” and the Folio (in the
Ledger) answers the question: a. Normally occurs before
GENERAL RULES IN POSTING:
“Where did you get this entry?” journalizing
(1) One account name and number = b. Transfer ledger transaction data
STANDARD FORM OF ACCOUNT to the journal
one ledger
(2) Transfer the journal entries to the c. Is an optional step in the
ledgers according to the date of recording process
the entries in the journal. d. Transfers journal entries to
(3) The brief explanation in the ledger accounts
journal will be written on the
Particular column of the Ledger. 4. Trial Balance
(4) Upon posting the journal entries,
SAMPLE OF A TRIAL BALANCE
write the account number on the
PR column in the journal and the
 2. A correct journal entry is not a. A correct journal entry is posted
posted. twice.
3. A journal entry is not posted. b. The purchase of supplies on
4. Incorrect accounts are used in account is debited to Supplies and
journalizing or posting. credited to Cash.
5. Offsetting errors are made in c. A $100 cash drawing by the
recording the amount of a owner is debited to Owner’s
transaction. Drawing for $1,000 and
credited to Cash for $100.
d. A $450 payment on account is
A TRIAL BALANCE is prepared after all debited to Accounts Payable and
Locating Errors
the journal entries for the period have credited to Cash for $45.
been recorded in the journal and posted Errors in a trial balance generally result 5. Adjusting Entry
to the account’s ledgers. It lists all the from: 6. Financial Statements
debit or credit balance of each ledger. 7. Closing Entries
 Mathematical mistakes, 8. Reversing Entries
What is the purpose of preparing a  Incorrect postings,
Trial Balance?  Or simply transcribing data
incorrectly.
A Trial Balance only checks that the sum
of debits are equal to the sum of credits. Currency Signs
If debits do not equal credits then the
accountant of bookkeeper must  Do not appear in journals or
determine why. It may be caused by ledgers
errors resulting to:  Typically used only in the trial
balance and the financial
(1) The mis posting or non-posting of statements
the entries from the journal to the  Shown only for first item in the
ledgers; column and for the total of that
(2) Wrong computation of the column
balance in the ledgers;
(3) Wrong balances carried over to Underlining
the Trial Balance.
 Single line is placed under
In this case, the accounting personnel will column of fingers to be added or
have to review the whole of the process. subtracted
 Totals are double-underlined
LIMITATION OF A TRIAL BALANCE
QUESTION 1.
Trial balance may balance even when:
A Trial Balance will not balance if:
1. A transaction is not journalized.