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Financial Accounting and Reporting

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4 views6 pages

Financial Accounting and Reporting

Uploaded by

Cian Ramos
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Financial Accounting and Reporting

Chapter 3: Recording Business Transactions

TRANSACTION ANALYSIS (STEP 1)

1. Identify the transaction from source documents.


2. Indicate the accounts whether - either an asset, liability, owner's equity, income, or
expenses (ALOE-CREW) - affected by the transaction.
3. Ascertain whether each account is increased or decreased by the transaction.
4. Using the rules of debit and credit, Determine whether to debited or credited the
account to record its increase or decrease.

SOURCE DOCUMENTS
- These original written evidences contain information about the nature and the amount of
the transactions.
- Pinanggalingan ng mga business transactions
- Mga proof or basis na nag exist yung mga Monetary/Financial Transactions na irerecord
the General Journal (The Book of Original Entry)

THE ACCOUNTING CYCLE AND THEIR AIMS


1. Identification of the events to be recorded
Aim: To gather information about transactions or event generally through the source
documents.

2. Transactions are Recorded in the journal


Aim: To record the economic impact of transactions of the firm in a journal, which in a
form that facilitates transfer to the accounts.

3. Journal entries are Posted to the Ledger


Aim: To transfer the information from the journal to ledger for classification.

4. Preparation of Trial Balance


Aim: To provide a listing to verify the equality of debits and credits to ledger.

5. Preparation of the Worksheet including the Adjusting Entries


Aim: To aid in the preparation of financial statements

6. Preparation of the Financial Statements


Aim: To provide useful information to decision-makers

7. Adjusting Journal Entries are Journalized and Posted


Aim: To record the accruals, expiration of deferrals, estimations and other events frlm
the worksheet.

8. Closing Journal Entries are Journalized and Posted


Aim: To close temporary accounts and transfer profit to owner's equity.

9. Preparation of Post-Closing Trial Balance


Aim: To check the equality of debits and credits after closing entries.

10. Revising Journal Entries are Journalized and Posted


Aim: To simplify the recording of certain regular transactions in the next accounting
period.

FOR THE STEPS #2, 3 AND 4 REFER HERE:

2. GENERAL JOURNAL (The Book of Original Entry)


Example: Shows all the effects of a transaction in terms of debit and credit

Office Equipment ₱xxxxx —------> “OFFICE EQUIPMENT" Account


Cash ₱xxxxx —------------> " CASH” Account
Accounts Payable ₱xxxxx -> " ACCOUNTS PAYABLE” Account

Posting - Transferring the amounts from the general


journal to appropriate accounts in the ledger

3. LEDGER
A grouping of accounts. Used to classify and summarize transactions and to prepare data for
basic financial statements.

4. TRIAL BALANCE (ALOE-CREW)


Listing of all “ledger accounts", in order, with their respective debit or credit balances.

THE JOURNAL
- The journal is a chronological record of the entity's transactions. A Journal Entry shows
all the effects of a business transaction in terms of debits and credits.
- Each transactions is initially recorded in the journal rather than directly to the ledger. A
journal is called “book of original entry”
- The nature and volume of transactions of the business determine the number and type
of journals needed. The GENERAL JOURNAL is the simplest journal.

FORMAT
The standard contents are as follows:
1. Date - The year and month are not rewritten for every entry unless the year of month
changes or a new page is needed.
2. Account Titles and Explanations - The account to be debited is entered at the extreme
left of the first line while the account to be credited is entered slightly indented on the
next line. A brief discussion of the transaction is usually made on the line below the
credit. Generally, skip a line after each entry
3. Posting Reference (P.R) - This will be used when the entries are posted, that is, until
the amounts are transferred to the related ledger accounts.
4. Debit
5. Credit

Example Transaction: Assume that Pao Cads established his own wedding consultancy with an
initial investment of ₱250,000 on May 1.

Date Account Titles P.R Debit Credit


and
Explanations

2024

May 1 Cash ₱250,000

Cads, ₱250,000
Capital

*To record Initial


Investment

SIMPLE AND COMPOUND ENTRY

In a simple entry, only two accounts are affected – one account is debited and the other is
credited. An example of this entry is to record the initial investment of Pao Cads. However,
some transactions require the use of more than two accounts. When three or more accounts are
required in a journal entry is referred to as compound entry.

TRANSACTIONS ARE JOURNALIZED (STEP 2)


After the transaction or event has been identified and measured, it is recorded in the journal.
The process of recording is called JOURNALIZING. The following are the transactions for Ex:
Wedding R “Us" during the month of May. The double-entry system will be used.

To understand the nature of the affected accounts, the letter A (for Asset), L (for Liability) or O.E
(for Owner's Equity) is inserted after each entry. In addition, O.E are further classified into O.E:I
(Income) and O.E:E (Expenses)
THE LEDGER
A grouping of the entity's account is referred to as a LEDGER. Although some firms may use
various ledgers to accumulate certain detailed information, all firms have a general ledger. A
general ledger is the “reference book" of the accounting system and is used to classify and
summarize transactions, and to prepare data for basic financial statements

CLASSIFIED INTO 2:
1. Balance Sheet or Permanent Accounts (A, L, and O.E)
2. Income Statement or Nominal Account/Temporary Account (Income and Expenses)
- used to gather information for a particular accounting period. At the end of the period,
the balance of these accounts are transferred to a permanent owner's equity account.

Each account has its own record in the ledger. Every account in the ledger maintains the basic
format of the t-account but offers more information (e.g the account number at the upper right
corner and the journal reference column). Compared to a journal, a ledger organizes
information by account.

CHART OF ACCOUNTS
- A listing of all the accounts and their account numbers in the ledger is known as “chart of
accounts". The chart is arranged in the financial statement order, that is assets first,
followed by liabilities, owner's equity, income, and expenses. The accounts should be
numbered in a flexible manner to permit indexing and cross-referencing.
- When analyzing transactions, the accountant refers to the chart of accounts to identify
the pertinent accounts to be increased or decreased. If an appropriate account title is not
listed in the chart, an additional account may be added.

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