ACCOUNTING CYCLE

• The accounting cycle refers to a

series of sequential steps or
procedures performed to
accomplish the accounting
process.
Steps in Accounting Cycle
Step 1. Identification of Events to be Recorded.
Step 2. Transactions are Recorded in the Journal.
Step 3. Journal Entries are posted to the Ledger.

Note:Step1-3 are accomplished during the period

Steps in Accounting Cycle
Step 4. Preparation of Trial Balance.
Step 5. Preparation of Worksheet including Adjusting
Entries.
Step 6. Preparation of Financial Statements.
Step 7. Adjusting Journal Entries are Journalized and Posted.
Step 8. Closing Journal Entries are Journalized and Posted.
Step 9. Preparation of a Post Closing Trial Balance.
Note: Step 4-9 are accomplished at the end of the period
Steps in Accounting Cycle
Step 10. Reversing Journal Entries
are Journalized and Posted.

Note: Step 10 is optional and occurs

at the beginning of the next
accounting period
STEP 1: Transaction Analysis
The analysis of transaction should follow these four
basic steps:
1. Identify the transaction from the source
documents.
2. Indicate the accounts-either assets, liabilities,
equity, income or expenses-affected by the
transaction.
3. Ascertain whether each account is increased or
decreased by the transaction.
4. Using the rules of debit or credit, determine
whether to debit or credit the account to record its
increase or decrease.
SOURCE DOCUMENTS
Source documents are the original
written evidences contain information
about the nature and the amounts of
the transactions. Source documents
identify and describe transactions and
events entering the accounting process.
These are the bases for the journal
entries; some of the more common
source documents are sales invoices,
cash register tapes, official receipts,
bank deposit slips, bank statements,
checks, purchase orders, time cards and
statements of account.
STEP 2: Transactions are Journalized
After the transaction or event has been identified and
measured, it is recorded in the journal. The process of
recording a transaction is called journalizing.
Note that the rules of double entry system are
observed in each transaction:
1. Two or more accounts are affected by each
transaction.
2. The sum of the debits for every transaction equals
the sum of the credits.
3. The equality of the accounting equation is always
maintained.
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.
A journal is also called the “book of original entry”.
The general journal is the simplest journal. The
standard contents of the general journal are as
follows:
1. Date
2. Account Titles and Explanation
3. P.R. (Posting Reference)
4. Debit
5. Credit
JOURNAL
• Assuming the Matta Byll deposited 300,000.00 in a
bank account in the name of the business, "Byll
Photography“ on April 1. The journal entry is shown
below:

• In a simple entry, only two accounts are affected-one

account debited and the other account credited. When
three or more accounts are required in a journal entry,
the entry is referred to as a compound entry.
STEP 3: POSTING
Posting means transferring the amounts from the
journal to the appropriate accounts in the ledger.
Debits in the journal are posted as debits in the ledger,
and credits in the journal as credits in the ledger. The
steps are illustrated as follows:
1. Transfer the date of the transaction from the journal
to the ledger.
2. Transfer the page number from the journal to the
(J.R.) column of the ledger.
3. Post the debit figure from the journal as the debit
figure in the ledger and the credit figure from the
journal as the credit figure in the ledger.
4. Enter the Account number in the (P.R.) column of the
LEDGER
A groupings of the entity’s accounts is referred to as
a 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.
The accounts in the general ledger are classified into
two general groups:
1. Balance Sheet or permanent accounts (assets,
liabilities and equity)
2. Income Statement or temporary accounts (income
and expenses)
Each account has its own record in the ledger. Every
account maintains the basic format of T-Accounts but
Chart of Accounts
A listing of all the accounts and their account
numbers in the ledger is known as the 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.
Chart of Accounts
Presented below is the chart of accounts for
illustration:
• The T-Accounts • The Ledger
STEP 4: TRIAL BALANCE
The Trial Balance is a list of all accounts with respective
debit or credit balances. It is prepared to verify the
equality of debits and credits in the ledger at the end of
each accounting period or any time the postings are
updated. The trial balance is a control device that helps
minimize accounting errors. When the totals are equal,
the trial balance is in balance.
The procedures in the preparation of a trial balance
follow:
1. List the account titles in numerical order.
2. Obtain the account balance of each account from the
ledger and enter the balances in the debit or credit
columns.
Trial Balance
The Trial Balance for the illustration follows:
 Locating Errors
An inequality in the totals of the debits and credits
would automatically signal the presence of error.
These error include:
1. Error in posting a transaction to the ledger:
• An erroneous amount was posted to the account.
• A debit entry was posted as a credit or vice versa
• A debit or credit posting was omitted.
2. Error in determining the account balances:
• A balance was incorrectly computed.
• A balance was entered in the wrong balance column.
3. Error in preparing the trial balance:
• One of the columns of the trial balance was incorrectly
added.
• The amount of an account balance was incorrectly recorded
on the TB
• A debit balance was recorded as credit in the TB or vice
 Locating Errors
The following procedures when done in sequence may
save considerable time and effort in locating errors.
1. Prove the addition of the trial balance by adding
these columns in the opposite direction.
2. If the error does not lie in addition, determine the
exact amount by which the trial balance is out of
balance. If the discrepancy is divisible by 9 , this
suggests either a transposition error or a slide.
3. Compare the accounts and amounts in the trial
balance with that in the ledger.
4. Recompute the balance of each account.
5. Trace all postings from the journal to the ledger
accounts.
 Locating Errors
Note that even a trial balance is in balance, the
accounting records may still contain errors. The
following errors are not detected by a trial balance.
1. Failure to record or post a transaction.
2. Recording the same transaction twice.
3. Recording an entry but with the same erroneous
debit or credit amounts.
4. Posting a part of a transaction correctly as debit or
credit but to the wrong account.
Adjusting the
Accounts
Accrual and Cash Basis
The FS, except for the cash flow statement, are
prepared on the accrual basis of accounting in order
to meet their objectives. Under the accrual basis, the
effects of transactions and other events are
recognized when they OCCUR and NOT as cash is
received or paid. This means that the accountant
records revenues as they are earned and expenses as
they are incurred.

In cash basis accounting, however, the accountant

does not record a transaction until cash is received or
paid. Generally, cash receipts are treated as revenues
and cash payments as expenses.
Periodicity Concept
The only way to know how successful a business has
operated is to close its doors, sell all its assets, pay
liabilities and return any excess cash to the owners.
This process of going out of the business is called
“liquidation”.
Accounting information is valued when it is
communicated early enough to be used for economic
decision-making. To provide timely information,
accountants have divided the economic life of a
business into artificial time periods. This assumption
is referred to as the Periodicity Concept.
Periodicity Concept
Accounting periods are generally a month, a
quarter or a year. The most basic accounting
period is one year. Entities differ their choice
of the accounting year- fiscal, calendar or
natural.
• Fiscal Year – A period of any twelve
consecutive months.
• Calendar Year – An annual period ending on
December 31.
• Natural Year – A twelve-month period that
ends when business activities are at their
lowest level of annual cycle.
Periodicity Concept
Businesses need periodic reports to assess
their financial condition and performance. The
periodicity concept ensures that accounting
is reported at regular intervals. It interacts
with the recognition and derecognition
principles to underlie the use of accruals. To
measure profit in a fair manner, entities
update the income and expense accounts
immediately before the end of the period.
 Recognition and Derecognition
Recognition is the process of capturing for inclusion
in the statement of financial position or the
statement(s) of financial performance an items that
meets the definition of an asset, liability, equity,
income or expenses. The amount at which an asset, a
liability or equity is recognized in the statement of
financial position is referred to as its “carrying
amount”.

Derecognition is the removal of all or part of a

recognized asset or liability from an entity’s
statement of financial position. Derecognition occurs
when that item is no longer meets the definition of an
asset or a liability.
 The need for Adjustments
Accountants make adjusting entries to reflect in the
accounts information on economic activities that have
occurred but have not yet been recorded. Adjusting
entries assign revenues to the period in which they
are earned, and expenses to the period in which they
are incurred.
These entries are needed to measure properly the
profit for the period, and to bring related asset and
liability accounts to correct balances for the FS.

In short, adjustments are needed to ensure that the

recognition and derecognition principles are followed
thus resulting to FS reporting the effect if all the
transactions at the end of the period.
 Deferrals and Accruals
There are two general types of adjustments made at
the end of the accounting period:
Deferral is the postponement of the recognition of “
an expense already paid but not yet incurred”, or of
“revenue already collected but not yet earned”.
Effect: Decreases balance sheet account and
Increases income statement
account
Accrual is the recognition of “an expense already
incurred but unpaid” or “revenue earned but
uncollected”.

Effect: Increases both balance sheet account and

income statement account
 Worksheet and
Financial Statements
The Worksheet
Worksheet- A multi-column document
that provides an efficient way to
summarize the data for financial
statements. The worksheet simplifies
the adjusting and closing process. It can
also reveal errors. The worksheet is not
part of the ledger or the journal, nor is
it a financial statement. It is a summary
device used by the accountant for his
convenience.
 STEP 5: PREPARING THE WORKSHEET
The basic structure of the worksheet is presented
below:
 STEP 5: PREPARING THE WORKSHEET
The steps in the preparation of worksheet:
1. Enter the account balances in the unadjusted trial balance
columns and total the amounts.
2. Enter the adjusting entries in the adjustments columns and
total the amounts.
3. Compute each account’s adjusted balance by combining the
unadjusted trial balance and the adjustment figures. Enter
the adjusted amounts in the adjusted trial balance columns
and total the amounts.
4. Extend asset, liability and equity amounts from the Adjusted
TB columns to the Balance Sheet columns. Extend the income
and expenses amounts to the income statement columns.
Total the statement columns.
5. Compute the profit or loss as the difference between total
revenues and total expenses in the IS. Enter profit or loss as
a balancing amount in the IS and in the BS, and compute the
final column totals.