Review of the Accounting Process

A. LESSON PREVIEW/REVIEW
a. Adjusting entries are necessary to obtain a proper matching of revenue and expense.
True / or False ____

b. An accrued revenue can best be described as an amount not collected and not currently
matched with Expenses.
True or False _/

Skill-Building

Let’s try to practice what you have learned!

Part I. Form groups of 5. Members must exchange ideas and present their answers to the class. Recall
the various definitions of Accounting from the following organizations. (AAA | ASC | AICPA)

American Accounting Accounting is a process of identifying, measuring and communicating

Association economic information to permit informed judgments and decisions by
users of the information.
(Hint: is a process )

Accounting Standards Accounting is a service activity. Its function is to provide quantitative

Council information primarily financial in nature which helps users make
informed decisions.
(Hint: service)

American Institute of Accounting is an art of recording, classifying, summarizing and

Certified Public interpreting financial information.
Accountants

(Hint: is an art)

Part II. What is an Accounting Cycle?

The accounting cycle represents the steps or accounting procedures normally used by entities to
record transactions and prepare financial statements.

Part III. What are the steps involved in the accounting cycle. Enumerate/Explain each step briefly.
 Step 1 Identifying and analyzing business documents or transactions
The accountant gathers information from source documents and determines the effect of
the transactions on the accounts.
Step 2 Journalizing
The identified accountable events are recorded in the journal.
Step 3 Posting
Information from the journal are transferred to the ledger.
Step 4 Preparing the unadjusted trial balance
The balances of the general ledger accounts are proved as to the equality of debits and
credits.
Step 5 Preparing the adjusting entries
The accounts are updated as of the reporting date on an accrual basis by recording accruals
expiration of deferrals, estimations, and other events often not signaled by new source
documents.
Step 6 Preparing adjusted trial balance (or worksheet preparation)
The equality of debits and credits are rechecked after adjustments are made.
Step 7 Preparing financial statements
These are the means by which the information processed is communicated to users.
Step 8 Closing the books
This involves journalizing and posting closing entries and ruling ledger. Temporary accounts
(nominal accounts) are closed and the resulting profit or loss is transferred to an equity
account.
Step 9 Preparing the post-closing trial balance
The of debits and credits are again rechecked after the closing process.
Step 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 that period.

Check for Understanding

1. The purpose of preparing a trial balance is to

a. Ensure that there were no errors committed.
b. To prove that all journal entries were posted correctly.
c. To prove the equality of the monetary totals of debits and credits.
d. All of these

2. It is a systematic compilation of a group of accounts.

a. Chart of accounts
b. Trial balance
c. Ledger
d. Journal

3. It is a list of accounts and their balances.

a. Chart of accounts
b. Trial balance
c. Ledger
 d. Journal

4. Which of the following criteria must be met before an event or item is recorded for accounting
purposes?
a. The event or item can be measured objectively in financial terms.
b. The event or item is relevant and reliable.
c. The event affects, or the item meets the definition of, a financial statement element.
d. All of these must be met.

5. A trial balance may prove that debits and credits are equal, but
a. An amount could be entered in the wrong account
b. transaction could have been entered twice
c. a transaction could have been omitted
d. all of these

6. When an item of expense is paid and recorded in advance, it is normally called a(n)
a. prepaid expense
b. accrued expense
c. estimated expense
d. cash expense
7. An unearned revenue can best be described as an amount
a. collected and currently matched with expenses
b. collected but not currently matched with expenses
c. not collected but currently matched with expenses
d. not collected and not currently matched with
8. Which of the following is a real (permanent) account?
a. Inventory
b. Sales
c. Accounts Receivable
d. Both Inventory and Accounts Receivable

9. Reversing entries are

1. Normally prepared for prepaid, accrued, and estimated items

2. Necessary to achieve a proper matching of revenue and expense

3. Desirable to exercise consistency and establish standardized procedures

A. 1

B. 2

C. 3

D. 1 and 2
 10. Adjusting entries that may be reversed include

A. all accrued revenues

B. those that debit an asset or credit a liability

C. all accrued expenses

D. all of these

11. Which of the following errors may be revealed by a trial balance?

A. A debit to salaries expense was posted in the ledger as a debit to insurance expense.

B. Expense already incurred was not recorded.

C. The debit and credit posting of a credit sale were omitted.

D. The credit posting of a payment of account payable was omitted.

12. A corporation received cash of ₱24,000 on August 1 for one-year’s rent in advance and
recorded the transaction on that day as a credit to unearned rent revenue for the full amount. The
December 31 adjusting entry is:

a. Rent revenue ₱10,000

Unearned rent revenue ₱10,000
b. Unearned rent revenue ₱24,000
Rent revenue ₱24,000
c. Rent revenue ₱14,000
Unearned rent revenue ₱14,000
d. Unearned rent revenue ₱10,000
Rent revenue ₱10,000

13. On July 1, a company paid a ₱600 premium for a three-year property insurance policy; insurance
expense was debited in full for the ₱600. The adjusting entry at the end of the year is:

a. Prepaid insurance ₱1,000

Insurance expense ₱1,000
b. Prepaid insurance ₱ 500
Insurance expense ₱ 500
c. Prepaid insurance ₱ 100
Insurance expense ₱ 100
d. Prepaid insurance ₱ 500
Insurance expense ₱ 500
14. On May 1, a company purchased a six-month subscription to an investment analysis service
publication. The ₱300 cash payment was debited to subscription expense at the time. The adjusting
entry on June 30, the end of the company’s fiscal year, is:

a. Subscription expense ₱100

Subscription payable ₱100
b. Prepaid subscriptions ₱100
Subscriptions expense ₱100
c. Prepaid subscription ₱200
Subscription expense ₱200
d. No adjusting entry was required because the subscription was for only six months not a full year.

15. A sole proprietor took some goods costing ₱800 from inventory for his own use. The normal
selling price of the goods is ₱1,600. Which of the following journal entries would correctly record this?

a. Drawings account 800

Inventory account 800
b. Drawings account 800
Purchases returns account 800
c. Sales account 1,600
Drawings account 1,600
d. None of these