Professional Documents
Culture Documents
Lesson 2
THE ACCOUNTING
PROCESS
-refers to the side of the account (debit or credit) where increases are
recorded.
Reco
Entries
r
d i ng
Preparation of
Post-Closing
Phas
Journalizing
Trial Balance
Summarizing Phase
e
THE ACCOUNTING
Journalizing and
Posting of CYCLE Posting
adjusting and
Closing Entries
Preparation of Preparation of
Financial Trial Balance
Statements
Preparation Compilation
of of data for
Worksheet adjustments
Step 1. Documentation
ASSETS
CURRENTS ASSETS
NON-CURRENT LIABILITIES
a. MORTGAGE PAYABLE - long-term debts with pledge
of certain assets
b. BONDS PAYABLE – long-term debts by issuing bonds
OWNER’S EQUITY
a. CAPITAL – original and additional investments of the owner/s
of the entity
b.WITHDRAWALS – when the owner/s withdraw cash or other
assets from the entity
c. INCOME SUMMARY – temporary account used at the end of
the accounting period to close income and expenses. This account
shows the profit or loss for the period
EXPENSES
a. COST OF SALES – cost incurred to purchase or produce the product sold
b. SALARIES OR WAGES EXPENSE – payments to employees
c. TELECOMMUNICATIONS, ELECTRICITY, FUEL AND WATER EXPENSES
Created by: Sheryl V. Paliza, CPA
TYPICAL ACCOUNT TITLES USED
EXPENSES
d. RENT – rentals of building or warehouse space, equipment and other
asset
e.SUPPLIES EXPENSE – expense of using supplies, ex. Office
supplies
f.
INSURANCE EXPENSE – portion of premiums paid on insurance
coverage which has expired
g. DEPRECIATION EXPENSE - the portion of cost of PPE allocated or
charged as expense during an accounting period.
h. UNCOLLECTIBLE ACCOUNTS EXPENSE – amount of receivables
estimated to be doubtful of collection and charged as expense during an
accounting period.
Created
i. INTEREST
by: Sheryl V. Paliza, CPA
EXPENSE – related to use of borrowed funds
Step 2. Journalizing
recording transactions for the first time in the accounting books called
journals
journals are called books of original entry.
General journal - most flexible type of journal where almost all
types of transactions can be recorded
Special journals - used in recording transactions that are usual and
that occur frequently or on a repetitive basis. The most common types
of special journals are the sales journal, purchases journal, cash
receipts journal, and cash disbursements journal.
ENTRY
Dr. Cr.
CASH (A)
Php 250,000
GEVERA, CAPITAL (OE)
Php 250,000
May 2 Rented office space and paid two-months rent in advance.
ENTRY
PREPAID RENT (A) Php
Created by: Sheryl V. Paliza, CPA
250,000
CASH (A)
May 4 Acquired service vehicle for P420,000.
ENTRY
Dr. Cr.
SERVICE VEHICLE(A) Php
420,000
CASH (A)
Php 420,000
May 5 Acquired office equipment from Fair and Square Emporium for P60,000;
paying P15,000 cash and the balance next month
Expense incurred but not yet paid as of the balance sheet date
Matched against income or earnings for the current period
2. To record adjustment
Expense XXX
at the end of the Prepaid Expense XXX
Prepaid Expense XXX
accounting period Expense
XXX
Amount recorded is Amount recorded is
the expired or used the unexpired or
portion of the unused portion of the
prepayment prepayment
Example 4: On May 1, 2014, JKL Company paid insurance P30 000 covering a period
of one year beginning on this date. The entries record the payment on May 1 and the
adjusting entry on December 31 the two methods are presented below:
ASSET METHOD
2014
May 1 Prepaid Insurance 30,000
Cash
30,000
Dec. 31 Insurance Expense 20,000
Prepaid Insurance
20,000
P30,000 x 8/12 = P20,000
Created by: Sheryl V. Paliza, CPA
The expired portion of the insurance premium
is for the period May 1 to December 31, 2014, or
EXPENSE METHOD
2014
May 1 Insurance Expense 30,000
Cash
30,000
Dec. 31 Prepaid Insurance 10,000
Insurance Expense
10,000
P30,000 x 4/12 = P10,000
The unexpired portion of the
insurance premium is 4
months; that is, 12 months less the expired portion of
eight (8) months.
Created by: Sheryl V. Paliza, CPA
D. UNEARNED INCOME
this is income already collected but not yet earned as of the statement of financial
position (balance sheet) date, such as rental income collected in advance or
subscriptions received in advance.
also known as deferred income
Adjustment depends on how the initial receipt of cash is recorded.
2. To record adjustment
Income XXX
at the end of the Unearned Income XXX
Unearned Income XXX
accounting period Income
XXX
Amount recorded is Amount recorded is
the earned portion of the unearned portion
the prepayment of the prepayment
If the asset is used for less than a year, the proportionate expense should
be calculated, unless the company adopts a different policy such as
providing half-year depreciation in the year of acquisition of the asset
Example 6: PQR Company acquired an office equipment on October 1, 2013 for P310,000. The asset
has an estimated useful life of 5 years and a estimated residual value of P10,000.
2013
Dec. 31 Depreciation Expense 15,000
Accumulated Depreciation
15,000
(P310,000 - P10,000)/5 yrs. X 3/12
Depreciation expense for 2013 is for three months, that
is, October 1 to December 31, 2013.
2014
Dec. 31 Depreciation Expense 60,000
Accumulated Depreciation
60,000
Created by: Sheryl V. Paliza, CPA
(P310,000 - P10,000)/5 yrs.
Depreciation expense for 2014 is for one year or twelve (12)
F. UNCOLLECTIBLE ACCOUNTS
represent customers' accounts that may no longer be collected or that may possibly
become bad debts.
Standards provide that trade accounts receivable should be reported in the statement
of financial position at amortized cost. Amortized costs is defined as the amount at
which the receivable is measured at the time it was first recognized minus any
payments and minus any reduction (directly or through the use of an allowance
account) for uncollectibility.
The entry to record estimated uncollectible accounts is as follows:
A work sheet is a working paper that contains the data in the trial
balance, the adjustments compiled in step 5, and the developed
income statement and statement of financial position data.
the adjustments that were recorded in the work sheet are now formally recorded in
the general journal and posted to the accounts in the general ledger.
The balances of the nominal (temporary) accounts, which consist of income,
expense, and drawing accounts, are then closed to Income Summary account.
The balance of the Income Summary account is then transferred to the owner's
equity (capital) account. A debit balance in the Income Summary account represents
a loss while a credit balance represents a profit.
The balance of the owner's drawing account is closed to owner's equity account.
When the closing process is completed, all nominal accounts zero balances.