Accounting Cycle

Accountancy Qualifying Exams 2011 Review

ACCOUNTING CYCLE Prepared by: DENNIS L. UDANI & 3rd Year JPIAns UNO-R Chapter

OVERVIEW OF THE ACCOUNTING CYCLE (1) Occurrence of Business Transaction (7) Financial Statements

(8) Closing Entries

(2) Journalizing

(3) Posting to the Ledger

(6) Worksheet

(9) Post-Closing Trial Balance

Qualifying Exams Review 2011 – ACCOUNTING CYCLE

(4) Trial Balance

(5) Adjusting Entries

(10) Reversing Entries

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ACCOUNTING CYCLE – Business Document  must be supported by business documents that will serve as basis for recording transactions (1) Occurrence of Business Transaction

 typical business documents are as follows: 1. Service Invoice 2. Official Receipt 3. Cash Voucher 4. Check 5. Promissory Note 6. Statement of Account 7. Sales Invoice 8. Deposit Slip

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ACCOUNTING CYCLE – Journalizing General Journal 1. Two-Column Journal 2. Four-Column Journal Special Journals

(2) Journalizing

JOURNALS



created for frequently occurring similar transactions to lessen the effort and time spent on journalizing and posting



transactions that cannot be recorded in special journals will be recorded in the general journal



examples of which is as follow: 1. Sales Journal 2. Cash Receipts Journal 3. Purchases Journal 4. Cash Payment Journal

(Books of Original Entry)

IMPORTANCE: • provides permanent record • provide easy access to accounting data • verification purposes • explanations will inform the reader of the nature of business transactions

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ACCOUNTING CYCLE – Journalizing (cont.) Example of a two-column journal

DEBIT – is the value received or paid for by the business CREDIT – is the value parted with or given up by the business

CROSS REFERENCE – is the process of writing down the account number of the ledger in the PR column of the journal as well as the page number of the journal where the entry was recorded in the PR column of the ledger.

 dual effect of business transaction Qualifying Exams Review 2011 – ACCOUNTING CYCLE

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ACCOUNTING CYCLE – Journalizing (cont.)

Special Journals

Purpose

1. Sales Journal

sales of merchandise on account

2. Cash Receipts Journal

cash received from any source

3. Purchases Journal

purchase of merchandise and other asset on

accounts 4. Cash Payment Journal/ Cash Disbursement Journal

Qualifying Exams Review 2011 – ACCOUNTING CYCLE

payment for various purposes

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ACCOUNTING CYCLE – Posting

General Ledger

(3) Posting to the Ledger

LEDGERS (Books of Final Entry)

Subsidiary Ledger a special ledger, which shows in detail the transactions affecting a customer or supplier

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ACCOUNTING CYCLE – Posting (cont.) Example of a general ledger

 T-Accounts are the skeleton form of the general ledger and it function in the same way as the ledger

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ACCOUNTING CYCLE – Trial Balance Two types: 1. Trial Balance of Totals 2. Trial Balance of Balances

(4) Trial Balance

Definition A list of all the accounts in the ledger (excluding those accounts with zero balances) at a given time with their corresponding balances. Its main purpose is to prove the equality of debits and credits. However, it does not provide complete proof of the accuracy of the ledger.

Limitations Trial balance is balance

Trial balance is NOT balance 1.

2. 3.

Difference between totals is evenly divisible by 2, debit or credit in posting have been omitted or debit amounts may have been posted to credit or vice versa Difference between totals is divisible by 10, 100, or 1000 – WRONG ADDITION Difference is evenly divisible by 9, either TRANSPOSITION OR SLIDE

1. 2. 3. 4. 5.

Qualifying Exams Review 2011 – ACCOUNTING CYCLE

Journalizing and/or posting the same transaction twice. No entry was made for a given transaction. Journal entry was not posted to the general ledger. Incorrect accounts were used to record a given transaction. Incorrect accounts were recorded for a given transaction. 9

ACCOUNTING CYCLE – Correcting Entries 1. 2. 3. 4. •

CORRECTION OF ERRORS

Correcting Entry – an entry made in the general journal to correct an error discovered

Errors in posting Errors involving erroneous accounts Errors involving erroneous amounts Errors involving erroneous account titles and erroneous amounts Return of defective office supplies of P1,000 originally purchased in cash was recorded as debit to Accounts Payable and credit Office Furniture of P100.

Analysis:  WRONG ENTRY Accounts Payable Office Furniture  SHOULD-BE ENTRY Cash Office Supplies  CORRECTING ENTRY Office Furniture Cash Accounts Payable Office Supplies

Qualifying Exams Review 2011 – ACCOUNTING CYCLE

P

100

P

100

1,000 1,000 100 1,000

100 1,000 10

ACCOUNTING CYCLE – Adjusting Entries Adjusting Entries – are journal entries made at the end of the accounting period to update the general ledger accounts

(5) Adjusting Entries

Merchandise Inventory, End

Impairment Loss on Receivable

Depreciation Expense

if the company uses periodic inventory system (Physical Count) 1. Direct Write Off Method 2. Allowance Method

Consider depreciation method used (e.g. Straight-Line, Sum-of-theYears Digit, etc.) Accrued Income

Adjustment – an amount that is added to or subtracted from an account balance to bring that balance up to date

Accruals Accrued Expense Unearned or Deferred Income

Deferrals Prepaid or Deferred Expense Qualifying Exams Review 2011 – ACCOUNTING CYCLE

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ACCOUNTING CYCLE – Adjusting Entries (cont.) Accrued Income

income already earned but not yet recorded because it is still uncollected

Accrued Income (Receivable) XXX Income Account XXX

Accruals

expense already incurred but not yet recorded because it is still unpaid Expense Account XXX Accrued Expense (Payable) XXX

Accrued Expense

Initial Entry Made

Unearned Income

Deferrals

income already collected and recorded but not yet earned

Prepaid Expense expense paid in advance and recorded as such

Adjusting Entry

Liability Method

Cash Liability XXX

Income Method

Cash XXX Revenue XXX Revenue XXX Liability XXX

Asset Method

Asset Cash

Expense Method

Cash XXX Asset XXX Expense XXX Expense XXX

Qualifying Exams Review 2011 – ACCOUNTING CYCLE

XXX

XXX

Liability XXX XXX Revenue

Expense XXX XXX Asset XXX

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ACCOUNTING CYCLE – Adjusting Entry (cont.) Example of Adjusting Entry: Pampanga Sweets had the following transactions pertaining to the fiscal year ended December 31, 2001 a. June 15, 2001

Paid an annual fire insurance premium of P10,800 for a policy beginning July 1, 2001

b. October 1, 2001

Received advance payment of P69,300 from a customer for a 9-month equipment rental.

Instructions: • Prepare adjusting entries at year-end assuming that no entries have been made between the transaction date at year-end and assuming that: 1. Transactions were originally recorded in asset and liability account 2. Transactions were originally recorded in revenue and expense accounts

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ACCOUNTING CYCLE – Worksheet

 Facilitates the preparation of the financial statement (6) Worksheet

 Not part of the financial statement  The columns depends on the necessity of the entity

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ACCOUNTING CYCLE – F/S

 The product of the accounting cycle (7) Financial Statements

 It composed of the following: 1. Statement of Financial Position 2. Statement of Comprehensive Income 3. Statement of Cash Flow 4. Notes to Financial Statement 5. Statement of Changes in Equity  Users:

Qualifying Exams Review 2011 – ACCOUNTING CYCLE

1. Internal 2. External

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ACCOUNTING CYCLE – Closing Entries Contra Accounts

accounts established to record deductions from related accounts with positive balance

Adjunct Accounts

accounts set up to record additions to related accounts

(8) Closing Entries

 close all nominal accounts to the income summary account and income summary accounts to retained earnings/capital Nominal Accounts

Account

Real Accounts Mixed Accounts

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ACCOUNTING CYCLE – Post-Closing TB

(9) Post-Closing Trial Balance

 List of all real account balance after the closing process has been completed  It proves the equality of the total debits and credits of all the real accounts

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ACCOUNTING CYCLE – Reversing Entries Accrued Income It is optional but necessary

(10) Reversing Entries

entries prepared at the beginning of the accounting period to facilitate the recording of expense payment and revenue receipts in the usual manner

Accrued Expenses

Prepaid Expenses using Expense Method Unearned Income using Income Method

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