5/18/22, 2:12 PM Chapter II: Accounting Cycle

Chapter II: Accounting Cycle

Site: My new Moodle site Printed by: Arn Kyla P. Esguerra
Course: CERTIFIED BOOKKEEPER Date: Wednesday, 18 May 2022, 2:12 PM
Book: Chapter II: Accounting Cycle

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5/18/22, 2:12 PM Chapter II: Accounting Cycle

Table of contents

1. The Accounting Cycle

2. Identifying and Analyzing Business Transactions

3. Record transactions in the Journal

4. Posting to the Ledger

5. Preparing Trial Balance

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5/18/22, 2:12 PM Chapter II: Accounting Cycle

1. The Accounting Cycle

Introduction
The accounting cycle is a series of procedures that involves specific steps in recording, classifying, summarizing, and interpreting transactions and
events for a business entity. This is commonly called as accounting process. It is the process of keeping track of business transactions by recording
and reporting them.

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5/18/22, 2:12 PM Chapter II: Accounting Cycle

Key Notes:

Recording
1. Identification of Accountable Transactions. Business transactions or events are analyzed
and identified whether they are accountable or not.

2. Journalizing. The transactions are recorded in the book of original entry known as the
journal. The transactions are recorded chronologically with the appropriate accounts and
amounts.

3. Posting. The transactions from the journal are classified in the book of final entry known as
the ledger. The ledger classifies the transactions effecting the increases and decreases for
each account.

Summarizing
4. Trial Balance. The summary of accounts balances from the ledger is prepared in the list of
accounts known as the trial balance. This is the proof that the ledger debit balance and credit
balances are equal and is in balance.

5. Adjusting Entries. Adjusting journal entries are made at the end of the accounting period
to assign revenues to the period in which they are earned and expenses to the period in
which they are incurred.

Reporting
6. Financial Statements. The following financial statements are prepared: statement of
financial position, statement of financial performance, statement of changes in equity,
statement of cash flows and the notes to the financial statements. These financial statements
provide useful information to interested parties for their decision-making.

7. Closing Entries. The temporary nominal accounts are eliminated from the accounts by
recording and posting the closing entries. This will prepare the accounting records for the
next accounting period.

8. Post-Closing Trial Balance. After the closing entries are posted, the post-closing trial
balance is prepared to check that the debit and credit balances of the remaining accounts are
correct.

Optional
9. Recording of Reversing Entries. At the beginning of the next accounting period, selected
adjusting journal entries made at the previous accounting period are reversed to “normalize”
the recording of the related actual transactions.

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5/18/22, 2:12 PM Chapter II: Accounting Cycle

2. Identifying and Analyzing Business Transactions

Business transactions or events are analyzed whether they are accountable or not. Only transactions which are identified to be accountable
transactions are recorded in the accounting records. A transaction or event is accountable when it meets the following criteria:

a. It affects the business entity.

b. It can be measured in terms of money.
c. It occurred on a specific date or for a specific period.
d. It affects the assets, liabilities or equity of the business.
e. It is supported by a document.

Examples of accountable transactions:

Mr. Luca Pacioli established Pacioli General Services and had the following transactions:

√ Investment of P100,000 capital funds by Mr. Pacioli into the business

√ Receipt of a Charge Invoice from a supplier for the purchase of a desktop computer
amounting to P30,000.
√ Purchase of supplies amounting to P8,000 in cash.
√ Issuance of a Service Invoice for an amount of P40,000 to a customer for services
rendered on account.
√ Receipt of P28,000 cash from customers in payment of their account.
√ Payment in cash and receipt of an official receipt from supplier for payment of
accounts, P22,000.
√ Cash payment of P12,000 for the salary of an employee.
√ Mr. Pacioli withdrew P10,000 cash from the business.

Examples of non-accountable transactions:

The owner of the business spent P80,000 for his wedding.

A secretary was hired for P15,000 monthly salary.
The company has been using the electricity for the first month of its operations but has
not yet received the electric bill.
The company has been recognized by the local government unit as the best service
provider in the locality. It is foreseen to grow into a P10 million company in the next few
years.

Business Documents
The business documents forms serve as evidence to support the accountable transactions or events. These documents provide the data concerning
the parties involved, the exchange made, the date and the money value of the exchange made. Some of the common business documents include
the following:

1. 1. Sales Invoice – document issued to customer for specific materials or supplies furnished or services rendered. It is called Purchase
Invoice from the point of view of the customer.
2. Delivery Receipt – document signifying delivery of goods and receipt of inventory.
3. Official Receipt – document issued to acknowledge receipt of cash.
4. Deposit Slip – document used to deposit cash and cheques to a bank.
5. Purchase Invoice – a bill from a vendor for specific materials or supplies furnished or services rendered. It is called Sales Invoice from
the point of view of the supplier.
6. Disbursement Voucher – a written, approved record of payment of cash.
7. Withdrawal Slip – document used to withdraw cash from a bank.
8. Cheque Issuance Record – a record of cheques issued by the company.
9. Promissory Notes – a written promise to pay a certain sum of money to the payee. It may sometimes bear an interest over a period of
time.
10. Bank Statement – a document listing the bank transactions of the depositor.
11. Billing Statement or Statement of Account – document listing the unpaid invoices of a customer. Oftentimes, it lists chronologically
the invoices, payments and adjustments to the account of the company.
12. Business Letters – correspondences to other companies, organizations or government entities which may serve as a basis in recording
an accountable transaction or event.
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5/18/22, 2:12 PM Chapter II: Accounting Cycle

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5/18/22, 2:12 PM Chapter II: Accounting Cycle

3. Record transactions in the Journal

This is also known as journalizing. The transactions are chronologically recorded in the journal. General Journal are also known as the Books of
Original Entry.

The transactions are recorded through a journal entry. A Journal Entry shows the record of the effects of a transaction or an event expressed in
terms of debit and credit. An entry with one debit and one credit is a simple journal entry, while an entry with one or more debits and credits is a
compound journal entry. A journal entry has the following elements:

1. The date of the transaction

2. The accounts debited and credited
3. The monetary values of the accounts debited and credited
4. The posting reference code of the destination ledger account
5. A brief and clear explanation of the transaction

A sample journal entries are as follows:

Note: Throughout the course, you will notice that we always use the word “account”. An account can be thought of as a collection of related entries. For
example, every entry that relates to our receivables from customers will be recorded in the “Accounts Receivable account”.

The specific account titles and codes to use are maintained in a Chart of Accounts. It is a list of the account codes and titles that must be used in
recording transactions in the Journal. It shall be maintained and updated for necessary changes, like additions of new accounts, change of titles and
codes and removal of accounts that will no longer be used.

The accounts are normally listed in the order in which they appear in the financial statements. An account code identifies the account which will
serve as its cross-reference in the journal and ledger.

A sample is as follows:

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5/18/22, 2:12 PM Chapter II: Accounting Cycle

The accountable transactions are recorded in the general journal following the Basic Accounting Equation:

Assets = Liabilities + Equity

This equation will guide the bookkeeper in recording the transaction. After the recording of each transaction using a journal entry, the accounting
equation will maintain its equality. This is possible under the double-entry accounting system.

Under the Double Entry Accounting System, at least two accounts will be recorded for each accountable transaction. The amount in every
transaction must be entered in one account as a debit (left side of the account)and in another account as a credit (right side of the account).
Because of the two-fold effect of transactions, the total effect on the left (Debit) will always be equal to total the effect on the right (Credit).

Effect of Accounting Entries to the Accounts

Note: It's more easy to remember the above effects when you familiarize yourself with the increase effect on accounts. The side where the account
increase its amount/value is actually the Normal Balance of that account.

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5/18/22, 2:12 PM Chapter II: Accounting Cycle

4. Posting to the Ledger

After the entries are recorded in the journal, the entries are posted into the ledger. A ledger is a collection of all of the accounts of the company, the
debits and credits under each account, and the resulting balances. For example, the cash ledger will summarize all the transactions that involved
cash. In bookkeeping, Ledgers are important because they summarize all transactions to show the running/ending balance of a specific account.

Posting to the ledger is the classifying phase of accounting. Posting refers to the process of transferring entries in the journal into the accounts in
the ledger. While journal is called the Books of Original entry, because journal entries are transferred in the ledger, the general ledger is often called
the book of final entry.

Each account has an assigned account number and the individual accounts are properly arranged. Each journal entry is posted into the related
ledger account indicating the following:

Date
Description
Posting Reference - serves as the cross-reference between the journal entry and the ledger account posting.
Debit and Credit amount
Running Balance of the account

Sample General Ledger:

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5/18/22, 2:12 PM Chapter II: Accounting Cycle

The Posting Reference GJ-1 refers to:

GJ-General Journal
1-Page 1

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5/18/22, 2:12 PM Chapter II: Accounting Cycle

5. Preparing Trial Balance

After the recording phase (Analyzing, Journalizing, and Posting), we enter the next step of the accounting cycle, the preparation of trial balance.

Trial balance is a listing of all the balances of the different accounts as of a given date. The account names are listed as arranged in the ledger and
the balances are placed either on the debit or credit column. The total of all accounts with debit balances must equal to the total of all accounts with
credit balances after the posting process. This trial balance is called an unadjusted trial balance (no adjustments yet).

There are other two types of trial balance: the adjusted trial balance which is prepared after adjusting entries, and the post-closing trial balance which
is prepared after closing entries.

Purpose of Trial Balance:

a. To check the accuracy of posting in the ledger by testing the equality of the debits and credits.
b. It aids in locating errors in posting.
c. It serves as the basis in the preparation of the financial statements.

Errors in the Accounting Process

When the total debits and total credits are not equal, this automatically signifies that there is an error in the recording or posting of entries. Some of
the errors that could occur are the following:

Journal entry with unequal debit and credit.

Posting to the incorrect debit or credit of an account.
Incorrectly footing the account balance, or trial balance.
Forwarding the wrong amount from the ledger to the trial balance.
Listing the account balance to the wrong side of the trial balance.

The trial balance does not guarantee that the records are accurate even if the total of debits and total of credits are equal. The following errors will
not be detected by the preparation of a trial balance:

Failing to record a transaction or event.

Multiple recording and posting of a transaction or event.
Entries or posting to the wrong account.
Recording and posting of amounts with transposition and trans-placement errors.

Here is an example of a Trial Balance:

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