PAGE1

FI
NANCI
ALACCOUNTI
NGANDREPORTI
NG

ACCOUNTI
NGPROCESS

Stepsi
ntheAccount
ingCycl
e–Therear
e9basi
cst
epsi
ntheaccount
ingcy
cle,
whi
chi
ncl
udes2phases
knownasrecor
dingandsummar
izi
ng.

RECORDI
NGPHASE
1.Analy
zing the tr
ansaction (
busi
ness document)-Thisis wher
et he accountant gathers
i
nformation f
rom sourcedocumentsand det er
minestheimpactofthetransaction on the
fi
nancial
positi
onasrepresent
edbytheequati
on“asset
sequal
sli
abi
li
ti
espl
usequity
” .
2.Journali
zing–Thi sist heprocessofrecordingthetransacti
onsintheappropri
atejour nal
s.A
j
ournali sachr onologicalr
ecordoft ransacti
onsal soknownast hebookofor iginalentry
.
Alt
houghal ltransactonscoul
i dberecordedi nthegener alj
ournal
,itismoreef fi
cientt ouse
specialjour
nalsinrecor
dingalargenumberofl i
ketransacti
ons.Special
jour
nalsthatenterpri
ses
usuallyuseare:
1.Sal
esJour nal–Onlysal
esofmer chandi
seonaccountarerecorded.
2.Cashreceiptsjour
nal–All
typesofcashreceipt
sarerecor
ded.
3.Purchasejournal–Usedt orecordallpurchasesonaccount( merchandi
se,equi
pment
andsuppli
es) .
4.Cashdisbursementjour
nal–Allpaymentsofcashforanypurposearerecorded.
Ty
peofj
our
nal
ent
ri
esaccor
dingt
ofor
m:
1.Simpl
ejour
nalentr
y–Onewhichcont
ainsasi
ngl
edebi
tandasingl
ecredi
tel
ement.
2.Compoundjournalentr
y–Onewhichhastwoormoreelementsandoft
enrepr
esent
ing
twoormoretr
ansactions.
Accountsaret hestorageunit
sofaccounti
ngi
nformati
onandusedt osummar i
zechangesin
asset
s,l i
abil
i
ties and equi
tyincl
udi
ng i
ncome and expenses. The f
oll
owi
ng ar
e a broad
cl
assif
icati
onofkindsofaccounts:

1.Realaccount–St at
ementoff inanci alposit
ionorsocal ledper manentaccount s.These
account sar enotclosedandcarry overtothenextaccount ingper iod.( ex.Cash, ARandPPE)
2.Nomi nalaccount–I ncomest at
ementort empor arycapi t
alaccount s.Theseaccount sare
closedatt heendoft heaccount
ingper i
od.(ex.Salesandexpenses)
3.Mi xedaccount–Acombi nati
onofr eal andnomi nal account s.(ex.Pr epaidexpenses)
4.Cl ear i
ngaccount–Hol dstempor ari
lycertaininformat ionpendi ngt ransf ert ootherledger
account s.
5.Cont roll
ingaccount–Thegener all edgeraccountt hatsummar izest hedet ai
ledinformation
i
nasubsi diar
yledger.
6.Suspenseaccount–I sanaccountt hatholdst empor ari
l
ycer taini nformat ionpendingf or
disposi t
ion.
7.Reci procalaccount–Hasacount erpartinanot herbookwi t
hi nt heent it
yori nanot her
l
edgeroranot herent
ity
.
8.Pr incipal account–Anaccountt hati sindependentorcanst andal one.
9.Auxi l
iaryaccount–Anaccountt hatcannotst andal oneandar et echni call
yneitherasset s,
l
iabilit
iesnori ncomeandexpenses.
10.Summar yaccount
3.Posti
ng-Itisthepr
ocessoftransf
erri
ngdat
afrom t
hejournalt
ot heappropri
ateaccountsinthe
gener
alledgerandsubsi
diar
yledger.Thi
sprocesscl
assif
iesallaccount
st hatwererecordedin
thej
ournals.
Ki
ndsofl
edger
s
1.Gener
al l
edger–Incl
udesall
theaccountsappear
ingonthefi
nanci
alstatements.
2.Subsi
diar
yledger
s–Af for
dsaddit
ionaldet
ail
insuppor
tofcert
aingenerall
edgeraccount
s.

SUMMARI
ZINGPHASE
4.Pr
epar
ingt
heunadj
ust
edt
ri
albal
ance–Al
i
stofgener
all
edgeraccount
swi
tht
hei
rrespect
ive
10/
16-
1
 PAGE2
debi
torcredi
tbal
ance.Thepur
poseoftheunadj
ust
edtr
ialbal
ancei
stoprov
ideevi
dencethat
thetot
aldebitsi
nthegener
alledgerequalt
hetot
alcr
editsandprepar
estheaccount
sf or
adj
ustments.

5.Prepar
ingadjust
ingentri
es– Tot akeupaccrual
s,expi
rati
onofprepaymentsanddeferr
als,
esti
mationsandotherev
entsof
tennotsi
gnal
edbynewsour cedocument
s.Adjust
ingent
ri
esare
madeatt heendofeachaccounti
ngperi
od.Theconceptsinvol
vedbehi
ndadjust
ingent
ri
esare
ACCRUAL, MATCHI NGOFCOSTSAGAI NSTREVENUEandACCOUNTI NGPERIOD.

Ty
pical
Adj
ust
ingEnt
ri
escl
assi
fi
edaccor
dingt
oti
mingofcashf
low.
1.Pr
epay
ment
sandDef
err
als–Thecashf
lowpr
ecedest
her
evenueort
heexpenser
ecogni
ti
on.

Pr
epai
dExpenses
AssetMet
hod ExpenseMet
hod

Pr
epai
dexpense(
asset
) xx Expense xx
Cash xx Cash xx

Adj
ust
ment
:
Expense x
x Pr
epaidexpense(
asset
) xx
Prepai
dexpense xx Expense xx

Def
err
edorUnear
nedRev
enue
Li
abi
l
ityMet
hod I
ncomeMet
hod

Cash xx Cash xx
Unear
nedI
ncome(
li
ab.
) xx Income xx

Adj
ust
ment
:
UnearnedI
ncome xx I
ncome xx
I
ncome xx Unear
nedI
ncome(
li
ab.
) xx

2.Accr
ual
s–I
ncomeorexpenser
ecogni
ti
onpr
ecedest
hecashf
low.
a.AccruedIncome–I ncomeear nedbutnotyetr
ecei
ved.Arecei
vabl
eisal
way
sdebi
tedand
i
ncomei srecognized( cr
edi
ted)
b.Accruedexpenses– Expensesi ncur
redbutnoty etpai
d. Anexpenseisr
ecogni
zed
(debi
ted)andaliabili
tyisal
way scredi
ted.
3.Est
imat
es–Adj
ust
ingent
ri
est
hatdonoti
nvol
vecashf
lows.
a.Doubtfulaccount
s–Theexpensetobemat chedagai
nstcredi
tsal
es.
b.Depreciat
ion-All
ocat
ionoft
hecostoff
ixedassetsasexpenseoveri
tsusef
ull
i
fe
4.Endi
nginvent
ory-Anadjust
menttosetupthey
ear-
endphy
sicalcountoft
hei
nvent
ory
.Thi
s
onl
yappli
esift
hePERIODICINVENTORYSYSTEM I
SUSED.
6.Pr
epari
ngthefinanci
alst
atement
s–Themostimport
antpar
tofthesummar
izi
ngphase,t
hisi
s
wher
etheprocessedinf
ormati
oniscommuni
cat
edt
oexter
naluser
s.
Basi
cf i
nancial
statements
a.St atementoff i
nanci
alposi
ti
on
b.I ncomest at
ementorast at
ementofcompr
ehensi
vei
ncome
c. Statementofchangesinequity
d.St atementofcashf l
ows
e. Not esanddisclosur
es
7.Prepar
ingthecl osi
ngentr
ies–Recordedandpost edforthepur
poseofclosi
ngallnomi
nalor
temporaryaccountstotheincomesummar yaccountandtheresul
ti
ngnetincomeorlossis
aft
erwardsclosedtothecapi
tal
orr
etainedearni
ngsaccount.
8.Prepar
ingthepostclosi
ngt r
ialbalance–Al i
sti
ngofgenerall
edgeraccount
sandthei
rbalances
aft
erclosi
ngentri
eshavebeenmade.Thepostcl osi
ngtr
ialbal
anceisthesamewi t
ht heyear
-
endstatementoffi
nancialposit
ion,theonl
ydiff
erencei
sthatval
uati
onaccount
sli
keallowances
10/
16-
1
 PAGE3
f
orasset
sar
efoundi
nthecr
edi
tsi
dei
nst
eadofbei
ngdeduct
edf
rom t
her
elat
edassetaccount
.
9.Prepari
ngr ev
ersi
ngentri
es– Thelastandopt i
onalst
epintheaccounti
ngcycl
e. Rev
ersi
ng
entr
iesar emadeatt hebegi
nningofthenew accounti
ngperi
odtoreversecer
tai
nadj
usti
ng
entr
iesfrom t
hesucceedi
ngaccount
ingper
iod.
Thepur poseofrever
singentr
iesisamat t
erofconv
eniencef
oraccrual
sandconsi
stencyfort
he
adjustmentsi
nt hefoll
owingy earforprepai
dexpensesanddefer
redincomewhent heincome
statementmethodwasusedt or ecordthecashfl
ow.
Onceagain,r
ever
singent
ri
eswi
l
lonl
yappl
ytot
hef
oll
owi
ngbutr
emembert
hatt
heyar
enot
necessar
yandonl
yopti
onal
:

1.Accruedincome
2.Accruedexpense
3.Prepai
dexpense,onlyiftheexpensemet
hodwasusedi
nrecor
dingt
hepay
ment
4.Unearnedincome,onlyifthei
ncomemethodwasusedi
nrecor
dingt
hecol
l
ect
ion

Accr
uedI
ncome Pr
epai
dexpense(
Exp.Met
hod)
12mos.rent
alat100permont
hbegi
nni
ngNov
. 18mos.rent
alat100permont
hbegi
nni
ngNov
.
1,2016. 1,2016
12/
31/
16Adj
ust
ment
: 11/
1/2016
RentRecei
vable 200 RentExpense 1,
800
RentIncome 200 Cash 1,
800

1/
1/2017Rev
ersi
ngent
ry: 12/
31/
2016Adj
ust
ment
:

RentI
ncome 200 Pr
epai
dRent 1,
600
RentRecei
vabl
e 200 RentExpense 1,
600
Aftertherev
ersal,therentrecei
vableaccount Theadjustmentundertheexpensemet hodwil
l
willhave a balance ofZERO and t he rent befortheunusedpor t
ionortheprepaymentof
i
ncomeaccountwi llhaveaDEBI Tbalanceof 1,
600. I fthe assetmet hod was used,the
200. Hence the collect
ion of1,200 wil
lbe adj
ustmentwoul d havebeen for200 ort he
recordedasfol
l
ows: por
tionfortheexpense.
10/
31/
2017 1/
1/2017Rev
ersi
ngent
ry:
Cash 1,
200 RentExpense 1,
600
RentI
ncome 1,
200 Pr
epai
dRent 1,
600
Aft
erthe rev
ersi
ng entr
y,the 1600 i
s once
agai
nexpensedandt he12/
31/2017adjust
ing
entr
ywil
lbeasfol
lows:
Pr
epai
drent 400
RentExpense 400
Ifther ev
ersi
ng ent
rywasnotpr epared,the
adjust
mentwoul dhavebeenadebi ttoRent
expenseandcr edi
ttoprepai
drentf or1,200
which isthe adj
ust
mentused i
ft he ASSET
METHODwasused.

END

10/
16-
1