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    Vii. The Accounting Cycle

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    Vii. The Accounting Cycle

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    VII. THE ACCOUNTING CYCLE

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    Vii. The Accounting Cycle

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    Ateneo de Zamboanga University

    ACCOUNTANCY ACADEMIC ORGANIZATION


    A School of Management and Accountancy Student Government

    THE ACCOUNTING CYCLE

    Accounting Cycle
    ● A step-by-step process to record business activities and events to keep financial
    records up to date.
    ● The process occurs over one accounting period and will begin the cycle again in the
    following period.
    ● A period is one operating cycle of a business, which could be a month, quarter, or
    year.

    Steps in the Accounting Cycle:

    The Accounting Cycle. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0
    license)

    1. Identify and Analyze the Transactions


    ● This takes information from original sources or activities and translates that
    information into usable financial data.
    ● Transactions are identified after analyzing all events.
    ● Example: Sales invoice as an original source, activities would include paying a
    worker and selling goods.

    2. Record Transactions to Journal


    ● Organize the analyzed data from Step 1 into a comprehensive record of every
    company transaction.
    ● Recorded in the primary book of accounts as debit and credit in chronological order.
    ● Example: ABC Co. purchases supplies worth $6000 from Fairy Company and pays in
    cash.

    Accountancy Academic Organization Tutorials 2018


    PAGE \* Arabic \*
    MERGEFORMAT 1
    Ateneo de Zamboanga University
    ACCOUNTANCY ACADEMIC ORGANIZATION
    A School of Management and Accountancy Student Government

    3. Post Journal Information to Ledger


    ● Posting - is the procedure for transferring journal entries to the ledger accounts. The
    following steps are used om posting:
    a. In the ledger, enter the appropriate columns of the account(s) debited the date,
    journal page, and debit amount.
    b. In the reference column journal, write the account number to which the debit
    amount was posted.
    c. Perform the same steps in a and b for the credit amount.
    ● Example based on the given in Step 2:

    4. Prepare Unadjusted Trial Balance


    ● Trial Balance - is a list of accounts and their balances at a given time. The trial
    balance proves the mathematical equality of debits and credits after posting.

    5. Adjusting Entries
    ● This step is made for:
    a. Revenues to be recorded in the period in which services are performed and
    for expenses to be recognized in the period in which they are incurred.
    b. The revenue recognition and expenses recognition principles are followed.

    Accountancy Academic Organization Tutorials 2018


    PAGE \* Arabic \*
    MERGEFORMAT 1
    Ateneo de Zamboanga University
    ACCOUNTANCY ACADEMIC ORGANIZATION
    A School of Management and Accountancy Student Government

    ● Adjusting entries are required every time financial statements are prepared. This can
    be classified as
    a. Deferrals – prepaid expenses or unearned revenue
    b. Accruals – accrued revenues or accrued expenses

    6. Preparing the Adjusted Trial Balance


    ● The purpose of the adjusted trial balance is to prove that the total debit balances are
    equal to the total credit balances in the ledger to be free from any error to provide
    correct information to complete the next steps of the accounting cycle.
    ● There are two methods for preparing the Adjusted Trial Balance
    a. Adjusting Entries to Ledger Accounts - this method is time-consuming but
    more systematic. The ledger accounts were first adjusted for the end of the
    period by adjusting entries, and then the account balances (based on the
    adjusting entries) are listed to prepare the adjusted trial balance.
    b. Adjusting Entries to Unadjusted Trial Balance - This method is simple and
    fast but less systematic usually used by small companies. The adjusting
    entries are directly incorporated into the unadjusted trial balance to convert it
    to an adjusted trial balance.

    7. Preparing the Financial Statements


    ● The balances in the financial statements are found in the adjusted trial balance.
    ● There are four kinds of financial statements:
    a. Income Statement / Statement of Comprehensive Income
    - This statement includes all the revenue and expense accounts.
    - It summarizes both the standard net income and other comprehensive
    income.
    - It shows the organization’s financial performance for a specific period
    of time.

    b. Statement of Changes in Owner’s Equity / Statement of Retained Earnings


    - It measures the changes in owner’s equity throughout a specific
    accounting period.
    - It covers the Net Income / Loss, Dividend Payments, Equity
    Withdrawals, Effect of accounting policies changes, Effect of prior
    period corrections, and Accumulated reserves and retained earnings
    - It is increased by income and owner’s contributions and decreased by
    losses and owner’s draws.

    Accountancy Academic Organization Tutorials 2018


    PAGE \* Arabic \*
    MERGEFORMAT 1
    Ateneo de Zamboanga University
    ACCOUNTANCY ACADEMIC ORGANIZATION
    A School of Management and Accountancy Student Government

    c. Statement of Financial Position / Balance Sheet


    - This statement lists the assets, liabilities, and equity of a company on
    a specific date.

    d. Statement of Cash Flows


    - Summarizes the amount of cash and cash equivalents entering
    (inflow) and leaving (outflow) a company during a specific period of
    time.
    - This financial statement complements the balance sheet and the
    income statement and has three components/areas: Operating
    Activities, Investing Activities, and Financing Activities.

    8. Closing Entries
    ● After having the adjusted accounts at the end of the accounting period, the company
    makes the accounts ready for the next period. This is called “closing the books”.
    ● Temporary / Nominal accounts include:
    - All revenue accounts
    - All expense accounts
    - Owner’s drawings
    - Income statement / Drawing accounts
    ● Permanent / Real Account includes:
    - All asset accounts
    - All liability accounts
    - Owner’s capital account
    - Balance Sheet accounts
    ● Only temporary accounts are closed and must have zero balances at the end of the
    accounting period. Permanent accounts are not closed from period to period rather,
    the balances are carried forward to the next accounting period.
    ● Closing entries are usually done at the end of an annual accounting period.

    Accountancy Academic Organization Tutorials 2018


    PAGE \* Arabic \*
    MERGEFORMAT 1
    Ateneo de Zamboanga University
    ACCOUNTANCY ACADEMIC ORGANIZATION
    A School of Management and Accountancy Student Government

    9. Prepare Post-Closing Trial Balance


    ● The purpose of this trial balance is to prove the equality of the permanent (statement
    of financial position) account balances that are carried forward into the next
    accounting period.

    10. Reversing Entries


    ● This is an optional step in the accounting cycle.
    ● These are made at the beginning pg the next accounting period which is to simplify
    the recording of a subsequent transaction related to an adjusting entry.

    Ne-Yo Agency
    Statement of Comprehensive Income
    For the Month Ended December 31, 2018
    Revenues
    Service Revenues P 4,700
    Expenses
    Salaries and Wages expense P 900
    Rent expense 600

    Accountancy Academic Organization Tutorials 2018


    PAGE \* Arabic \*
    MERGEFORMAT 1
    Ateneo de Zamboanga University
    ACCOUNTANCY ACADEMIC ORGANIZATION
    A School of Management and Accountancy Student Government

    Advertising expense 250


    Utilities expense 200 1, 950
    Net Income P 2,750
    Ne-Yo Agency
    Statement of Changes in Owner’s Equity
    For the Month Ended December 31, 2018

    Owner’s Capital, November 1 P -0-


    Add: Investments P 15,000
    Net Income 2,750 17,750
    17,750
    Less: Drawings 1,300
    Owner’s Capital, December 31 P16,450

    Ne-Yo Agency
    Statement of Financial Position
    December 31, 2018
    Assets
    Cash P 8,050
    Accounts Receivable 1,400
    Supplies 1,600
    Equipment 7,000 P 18,050
    Liabilities and Owner’s Equity
    Liabilities
    Accounts Payables P 1,600
    Owner’s Equity
    Owner’s, Capital 16,450 P 18,050

    Ne-Yo Agency
    Statement of Cash Flows
    For the Month Ended December 31, 2018
    Cash flows from operating expenses
    Cash receipts from revenues P 3,300
    Cash payments for expenses (1,950)
    Net cash provided by operating activities 1, 350
    Cash flows from investing activities
    Purchase equipment (7,000)
    Cash flows from financing activities
    Investments by owner P 15,000
    Drawings by owner (1,300) 13, 700
    Net increase in cash 8,050
    Cash at the beginning of the period 0
    Cash at the end of the period P 8,050

    Accountancy Academic Organization Tutorials 2018


    PAGE \* Arabic \*
    MERGEFORMAT 1

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