Accountancy Qualifying Exams 2011 Review

ACCOUNTING
CYCLE

Prepared by: DENNIS L. UDANI & 3rd Year JPIAns

UNO-R Chapter
 OVERVIEW OF THE ACCOUNTING CYCLE
(2) (3) (4)
(1) Journalizing Posting to the Trial Balance
Occurrence of Ledger
Business
Transaction
(6)
(7) Worksheet (5)
Financial Adjusting Entries
Statements

(8) (9) (10)

Closing Entries Post-Closing Reversing
Trial Balance Entries

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 2

 ACCOUNTING CYCLE – Business Document

 must be supported by business

documents that will serve as basis for
recording transactions

(1)  typical business documents are as

Occurrence of follows:
Business 1. Service Invoice
Transaction 2. Official Receipt
3. Cash Voucher
4. Check
5. Promissory Note
6. Statement of Account
7. Sales Invoice
8. Deposit Slip

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 3

 ACCOUNTING CYCLE – Journalizing
General Journal

1. Two-Column Journal
2. Four-Column Journal

Special Journals
(2)
Journalizing JOURNALS  created for frequently occurring
(Books of Original similar transactions to lessen the
Entry) effort and time spent on journalizing
and posting
IMPORTANCE:
• provides permanent record  transactions that cannot be recorded
in special journals will be recorded
• provide easy access to accounting data
in the general journal
• verification purposes
• explanations will inform the reader of the  examples of which is as follow:
nature of business transactions 1. Sales Journal
2. Cash Receipts Journal
3. Purchases Journal
4. Cash Payment Journal

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 4

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

DEBIT – is the value received or paid for CROSS REFERENCE – is the process of
by the business writing down the account number of the
ledger in the PR column of the journal as
CREDIT – is the value parted with or given well as the page number of the journal
up by the business where the entry was recorded in the PR
column of the ledger.
 dual effect of business transaction

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 5

 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/ payment for various purposes

Cash Disbursement Journal

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 6

 ACCOUNTING CYCLE – Posting

General Ledger

(3)
Posting to the LEDGERS
(Books of Final
Ledger Entry)

Subsidiary Ledger

a special ledger, which shows in

detail the transactions affecting a
customer or supplier

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 7

 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

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 8

 ACCOUNTING CYCLE – Trial Balance

Two types: Definition

1. Trial Balance of Totals
2. Trial Balance of A list of all the accounts in the ledger (excluding those accounts with
Balances 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.
(4)
Trial Balance Limitations

Trial balance is Trial balance is

NOT balance balance
1. Difference between totals is evenly divisible by 1. Journalizing and/or posting the same transaction
2, debit or credit in posting have been omitted twice.
or debit amounts may have been posted to 2. No entry was made for a given transaction.
credit or vice versa 3. Journal entry was not posted to the general
2. Difference between totals is divisible by 10, ledger.
100, or 1000 – WRONG ADDITION 4. Incorrect accounts were used to record a given
3. Difference is evenly divisible by 9, either transaction.
TRANSPOSITION OR SLIDE 5. Incorrect accounts were recorded for a given
transaction.
Qualifying Exams Review 2011 – ACCOUNTING CYCLE 9
 ACCOUNTING CYCLE – Correcting Entries
1. Errors in posting
2. Errors involving erroneous accounts
3. Errors involving erroneous amounts
4. Errors involving erroneous account titles
and erroneous amounts
• Return of defective office supplies of P1,000 originally purchased
CORRECTION in cash was recorded as debit to Accounts Payable and credit
OF ERRORS Office Furniture of P100.

Analysis:
 WRONG ENTRY
Accounts Payable P 100
Office Furniture P 100
 SHOULD-BE ENTRY
Correcting Entry – an entry Cash 1,000
made in the general journal Office Supplies 1,000
to correct an error  CORRECTING ENTRY
discovered Office Furniture 100
Cash 1,000
Accounts Payable 100
Office Supplies 1,000
Qualifying Exams Review 2011 – ACCOUNTING CYCLE 10
 ACCOUNTING CYCLE – Adjusting Entries
if the company uses periodic
Adjusting Entries – are Merchandise inventory system (Physical
journal entries made at the Inventory, End Count)
end of the accounting period
to update the general ledger
accounts 1. Direct Write Off Method
Impairment Loss 2. Allowance Method
on Receivable
(5) Consider depreciation method used
Adjusting Entries (e.g. Straight-Line, Sum-of-the-
Depreciation
Years Digit, etc.)
Expense

Accrued Income
Adjustment – an amount
that is added to or Accruals
subtracted from an account Accrued Expense
balance to bring that
balance up to date Unearned or Deferred Income
Deferrals
Prepaid or Deferred Expense

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 11

 ACCOUNTING CYCLE – Adjusting Entries (cont.)
income already earned but not yet recorded because it is still
Accrued Income uncollected
Accrued Income (Receivable) XXX
Income Account XXX
Accruals expense already incurred but not yet recorded because it is
Accrued Expense still unpaid
Expense Account XXX
Accrued Expense (Payable) XXX
Initial Entry Made Adjusting Entry

Unearned Liability Cash XXX Liability XXX

Method Liability XXX Revenue
Income XXX
income already Income Cash XXX Revenue XXX
collected and Method Revenue XXX Liability XXX
Deferrals recorded but not yet
earned
Asset Asset XXX Expense XXX
Prepaid Method Cash XXX Asset XXX
Expense
expense paid in Expense Cash XXX Asset XXX
advance and Method Expense XXX Expense XXX
recorded as such

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 12

 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

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 13

 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

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 14

 ACCOUNTING CYCLE – F/S

 The product of the accounting cycle

(7)  It composed of the following:

Financial 1. Statement of Financial Position
Statements 2. Statement of Comprehensive
Income
3. Statement of Cash Flow
4. Notes to Financial Statement
5. Statement of Changes in Equity

 Users: 1. Internal
2. External

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 15

 ACCOUNTING CYCLE – Closing Entries
Contra accounts established to record deductions
Accounts from related accounts with positive balance

Adjunct accounts set up to record additions to related

Accounts accounts

(8)  close all nominal accounts to the income

Closing Entries summary account and income summary
accounts to retained earnings/capital

Nominal
Accounts

Account Real Accounts

Mixed
Accounts

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 16

 ACCOUNTING CYCLE – Post-Closing TB

 List of all real account balance after the

(9) closing process has been completed
Post-Closing
Trial Balance  It proves the equality of the total debits
and credits of all the real accounts

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 17

 ACCOUNTING CYCLE – Reversing Entries

Accrued Income
It is optional but
necessary

(10) Accrued Expenses

Reversing
Entries
Prepaid Expenses using
Expense Method
entries prepared at the
beginning of the accounting Unearned Income using
period to facilitate the Income Method
recording of expense
payment and revenue
receipts in the usual manner

Qualifying Exams Review 2011 – ACCOUNTING CYCLE 18