REVIEW OF ACCOUNTING PROCESS

The accounting process can be described as a set of

procedures used in identifying, recording, classifying, and
interpreting information related to the transactions and other
events of a business enterprise.
Accounting system
Means by which a reporting entity records and stores the
financial and managerial information from its transactions or
events so that it can retrieve and report the information in an
accounting statement.
Elements:
Bookkeeping system
Records and reports
Procedures
Statement of accounting policies and standards
Personnel
Equipment and devices
Systems of Bookkeeping
Double entry bookkeeping
Views a transaction as having 2-fold effect on accounting
values
Single entry bookkeeping
As a general rule, only cash and personal accounts are
recognized
Double entry accounting
Basic accounting equation: Assets = Liabilities + Owners
Equity
Debits are entries on left side of accounts and credits are
entries to right side of accounts.
Journal entries provide a systematic method for summarizing a
business events effect on the basic accounting equation.
Summary
Assets are increased by debits and decreased by credits.
Liability and owners equity accounts are increased by credits
and decreased by debits.
Owners equity for a corporation includes capital stock and
retained earnings accounts.
Revenues, expenses, and dividends relate to owners equity
through the retained earnings account.
Expense and dividends are increased by debit and decreased
by credits.
Revenues are increased by credits and decreased by debits.
Revenues expenses = net income for the period, which
increases owners equity through retained earnings.
Overview of the Accounting Process

B. Record transactionsoriginally record debits and credits in

chronological order in a journal.
Journal - sometimes referred to as the book of original entry. A
general journal is merely a chronological listing of
transactions expressed in terms of debits and credits to
particular accounts.
Types of Journal Entries
As to the time prepared
Opening entry
Current entries
Adjusting entries
Closing entries
Reversing entries
Correcting entries
Reclassification entries
As to form
Simple journal entry
Compound journal entry
Types of Journal
Simple journal
General journal
Combination journal
Special journal
Cash receipts journal
Cash disbursement journal
Sales journal
Purchase journal
Voucher register
Requisition journal
Finished goods journal
Factory journal
Voucher system a special method of accounting for business
transactions which involves the payment of cash immediately
or in the future. It is one of the means of establishing internal
control over the expenditure of the business.
Books of accounts used:
Voucher register
Check register
Sales register
Cash receipts journal
General journal

C. Post transactionstransfer debits and credits to ledger

accounts which summarize changes in financial statement
elements (assets, liabilities and owners equity, revenues, and
expenses).

Recording Phase
A. Analyze business documentsascertain what transactions
and events should be recorded.
Transactions - Transactions are events that transfer or
exchange goods or services between two or more entities.
Real accounts are balance sheet accounts (asset, liability, or
equity account)
Nominal accounts- are income statements accounts (revenue
or expense account).

Ledger refer to the book of final entry. Summarized the total

credits and total credits posted per account.
Posting Transferring amounts from a journal to the ledger.
Transactions recorded in a general journal must be posted
individually, whereas entries made in specialized journals are
generally posted by columnar total.
Kinds of Ledger
General ledger
Private ledger
Subsidiary ledger

Accounts receivable ledger

Accounts payable ledger
Work in process ledger
Finished goods ledger
Factory ledger
Plant ledger
Expense ledger

Reporting Phase
A. Prepare a trial balancea list of balances in general ledger
accounts; first two columns of a worksheet.
Trial balance - A trial balance is a list of all open accounts in
the general ledger and their balances. Proves the equality of
total debits and total credits.
Types of Trial Balance
As to the time prepared
1. Unadjusted trial balance
2. Adjusted trial balance
3. Post-closing trial balance
As to form
Trial balance of balances
Trial balance of totals

yet received or only partially so.

a. Was recorded by an original debit to an asset accountnow,
debit expense and credit asset.
b. Was recorded by an original debit to expensenow, debit
asset and credit expense.
6. Deferred revenuesrecorded cash receipts for services to
be rendered in the future or only partially rendered at the
balance sheet date.
a. Was recorded by an original credit to a revenue account
now, debit revenue and credit liability.
b. Was recorded by an original credit to a liability account
now, debit liability and credit revenue.
7. Adjusting the inventory account.
a. Periodic system. Under the adjusting method, debit/credit
Inventory for the increase/decrease from the beginning of the
period, then make appropriate entries to transfer the balances
in Purchases and related accounts to Cost of Goods Sold.
b. Perpetual system. No adjustment is needed, except for
unrecorded spoilage, theft losses, or other shrinkage (as
evidenced by a difference in the balance of the inventory
account with the appropriate balance as determined according
to a physical inventory).
C. Prepare financial statements. Financial statements may be
prepared from the adjusted account balances in the ledger or a
work sheet. Preparation should include footnote disclosures.

Errors revealed by a trial balance

Error of transplacement
Error of transposition
Error in posting one side of an entry
Omission in posting one side of an entry

Work sheet - serves as an aid to the accountant in adjusting the

account balances and preparing the financial statements. The
work sheet provides an orderly format for the accumulation of
information necessary for preparation of financial statements.
Use of a work sheet does not replace any financial statements,
nor does it alter any of the steps in the accounting cycle.

Errors not revealed by a trial balance

Wrong computation
Wrong classification of account
Double posting both sides of an entry
Omission in posting both sides of an entry
Omission in journalizing a transaction

D. Close the nominal accounts. All nominal (temporary)

account balances are brought to zero at the end of the fiscal
year. These accounts are being closed to income summary
account. Any balance is transferred to retained earnings for
corporation, and to capital account for sole proprietorship and
partnership. Real accounts are not closed.

B. Prepare adjusting entriesall relevant information that has

not been recorded must be determined, recorded, and posted
so that accounts are current prior to preparing financial
statements.

Closing entries - All nominal accounts are reduced to zero by

closing them through the Income Summary account.

Adjusting entries - Adjusting entries are entries made at the

end of accounting periods to bring all accounts up to date on
an accrual accounting basis so that correct financial statements
can be prepared.
Preparing adjusting entries
1. Asset depreciationa systematic allocation of an assets
cost to expense and a reduction, using a contra (or offset)
account, in carrying value for a period during which the asset
is used in operations.
2. Bad Debtsestimated amount of uncollectible accounts
receivable charged to current periods income as bad debt
expense.
3. Accrued expensesexpenses incurred, but not to be paid
until a following period.
4. Accrued revenuesrevenues earned, but not to be received
in cash until a following period.
5. Prepaid expensesrecorded cash payments for benefits not

E. Prepare a post-closing trial balance.

1. Debits and credits should be equal after closing
The post-closing trial balance should show that all nominal
accounts carry zero balances into the new year.
Reversing entries - A reversing entry is made at the beginning
of the next accounting period and is the exact opposite of the
adjusting entry made in the previous period. The recording of
reversing entries is an optional step in the accounting cycle
that may be performed at the beginning of the next accounting
period. The entries subject to reversal are the adjusting entries
for accrued revenues and accrued expenses initially entered in
expense or income accounts.