ACCOUNTING PROCESS

Accounting Process
Step 1. Analyzing Source Documents
Step 2. Recording in Journal Recording Phase
Step 3. Posting to Ledger
Step 4. Unadjusted Trial Balance
Step 5. Adjusting Entries
Step 6. Financial Statements
Step 7. Closing Entries Summarizing Phase
Step 8. Post-closing Trial Balance
Step 9. Reversing Entries Optional
RECORDING PHASE:
STEP 1: Analyzing Source Documents
- Identification of events to be recorded
- To gather information about transactions or events generally through the source
documents.
STEP 2: Recording in the Journal
- To record the economic impact of transactions on the firm in a journal, which is a
form that facilitates transfer the account
- Recording of the entity’s transactions in a chronological order.
- It shows all the effects of a business transaction in terms of debits or credits.
- A journal is called the book of original entry.
STEP 3: Posting to the ledger
- To transfer the information from the journal to the ledger for classification.
SUMMARIZING PHASE:
STEP 4: Unadjusted Trial Balance ( Preparation of Worksheet)
- To provide a listing to verify the equality of debits and credits in the
ledger.

STEP 5: Preparation of Adjusting Entries

- To update the balances of accounts
- To correct the balances of accounts
Adjusting entries compose at least one nominal account and one
permanent account.
 7 Normal Adjusting Entries

1. Ending Inventory 6. Prepaid Expenses

2. Depreciation a. Asset method
3. Doubtful Accounts b. Expense method
4. Accrued Expense
5. Accrued Income 7. Deferred Income
a. Liability method
b. Income method
Adjusting Entry for Ending Inventory:
Example:
Purchased on account 1,000 units @ 50
Purchase returns, 20 units @ 50
Sold on account, 700 units @ 100
Sales return, 10 units @ 50
Actual inventory through physical count, 275 units

PERPETUAL INVENTORY PERIODIC INVENTORY SYSTEM

SYSTEM
Adjusting entry of Inventory short or over 750 Merchandise Invty, end 13,750
ending inventory Merchandise Inventory 750 Income & Exp. Summary 13,750
DEPRECIATION:
Sample Problem:
The following data relate to an equipment acquired at the beginning of the first
year:
Equipment P105,000
Residual Value 5,000
Useful life 5 years

Adjusting Entry:
Depreciation Expense 20,000
Accumulated Depreciation 20,000
Provision for Doubtful Accounts
Methods in accounting for doubtful accounts:

ALLOWANCE METHOD DIRECT WRITEOFF METHOD

1. Recognition of Doubtful accounts xx No entry
Doubtful Accounts Allowance for Doubtful Accts xx
2. Accounts proved to Allowance for Doubtful Accts xx Bad debts xx
be worthless Accounts Receivable xx Accounts Receivable xx
3. Recoveries of Accounts Receivable xx Accounts Receivable xx
accounts written off Allowance for Doubtful Accts xx Bad Debts xx

Cash xx Cash xx
Accounts Receivable xx Accounts Receivable xx
Sample Problem:
Park View Hotel and Restaurant has an outstanding accounts receivable of
P150,000 which recorded allowance for uncollectible account of P2,000. At the
end of the year, It is estimated that 5% of this doubtful of collection.
Computation:
Accounts Receivable P150,000
x % of uncollectible accounts 5%
Required Allowance P 7,500
Less: Allowance already provided P 2,000
Needed increase in allowance P 5,500
ALLOWANCE METHOD DIRECT WRITEOFF METHOD
1. Recognition of Doubtful Doubtful accounts 5,500 No entry
Accounts Allowance for Doubtful Accts 5,500
ACCRUED INCOME – it is an income that is already earned but not yet collected
when the accounting period ends. Purpose of the adjusting entry is to record the
income earned and recognize the corresponding asset account (receivable).
ACCRUED EXPENSES – It is an expense that is already incurred but not yet paid
when the accounting period ends. The purpose of the adjusting entry is to record
the expenses incurred and recognize the corresponding liability account.
ILLUSTRATION:
A building owned by Metro Davao Hotel was partly rented by Allied Banking
Corporation for P20,000 per month payable every 5th day of the following month.
The rental for the month of December 2016 will be paid on January 5, 2017.
Adjusting entries: Metro Davao Hotel Allied Bank Corpo.
Accrued Rent Receivable 20,000 Rent expense20,000
Rent Income 20,000 Accrued Rent Expense 20,000
PREPAID EXPENSES – this is an expense that is already paid but not incurred.
Methods to record prepayments:
1. Expense method (nominal approach) – an expense account is debited upon
payment of the prepaid expense.
2. Asset method (real approach) – an asset account is debited upon payment of
the prepaid expense.
ILLUSTRATION: On September 1. 2016, the business paid an insurance premium covering the
period from September 1, 2016 to September 1, 2017 in the amount of P3,600. The accounting
period ends December 31, 2016.
Original entry upon payment on September 1,2016:
Expense Method Asset Method
Insurance Expense 3,600 Prepaid Insurance 3,600
Cash 3,600 cash 3,600
Adjusting entry at the end of year 2016.
Expense Method Asset Method
Prepaid Insurance 2,400 Insurance Expense 1,200
Insurance expense 2,400 Prepaid Insurance 1,200
- to record the unexpired portion - to record the expired portion
of insurance premium of insurance premium
DEFERRED INCOME- this is an income that is already collected but not yet earned.
Methods in recording deferred income:
1. Income method (nominal approach) – an income account is credited upon collection or
receipt of cash.
2. Liability method (real approach)- liability account is credited upon collection or receipt
of cash.
ILLUSTRATION: On October 1, 2016, the business collected P12,000 from a tenant
representing an advance collection from building rental for one year. The accounting
period ends on December 31, 2016.
Original entry on October 1, 2016:
Income Method Liability Method
cash 12,000 cash 12,000
rent income 12,000 unearned rent income 12,000
Adjusting entry at the end of December 2016.
Income Method Liability Method
Rent Income 9,000 Unearned Rent income 3,000
Unearned Rent Income 9,000 Rent Income 3,000
- To record unearned portion of rent collected - To record earned portion of rent
collected in advance
Step 6: Financial Statements
Complete Set of General Purpose Financial Statements
1. Statement of financial position – Real/Permanent Accounts
2. Income Statement- Nominal/Temporary Accounts
3. Statement of Comprehensive Income
4. Statement of Changes in Equity
5. Statement of cash flows
6. Notes, comprising a summary of significant accounting policies and other
explanatory information
 Step 7: Closing Entries ( journalized and posted )
- Its purpose is to zero out temporary accounts by transferring all temporary
accounts to a permanent account
Step 8: Post-closing Trial Balance
- To check the equality of debits and credits after closing entries.
Step 9: Reversing entry- made at the beginning of the next period
- Generally, reversing entry should be made for any adjusting entry that
increased an asset or a liability account.
- To simplify the recording of certain regular transactions in the next
accounting period.
Journal entries to be reverse:
1. Accrual of income 3. Prepaid expense ( expense method )
2. Accrual of expenses 4. Deferred income (income method)