ACCOUNTING PROCESS

Steps in the Accounting Cycle – There are 9 basic steps in the accounting cycle, which includes
2 phases known as recording and summarizing.

RECORDING PHASE
- Analyzing the transaction (business document)- This is where the accountant gathers
information from source documents and determines the impact of the transaction on the
financial position as represented by the equation “assets equal liabilities plus equity”.

- Journalizing – This is the process of recording the transactions in the appropriate journals.
A journal is a chronological record of transactions also known as the book of original
entry. Although all transactions could be recorded in the general journal, it is more
efficient to use special journals in recording a large number of like transactions. Special
journals that enterprises usually use are:
a) Sales Journal – Only sales of merchandise on account are recorded.
b) Cash receipts journal – All types of cash receipts are recorded.
c) Purchase journal – Used to record all purchases on account (merchandise,
equipment and supplies).
d) Cash disbursement journal – All payments of cash for any purpose are recorded.
Type of journal entries according to form:
i. Simple journal entry – One which contains a single debit and a single credit
element.
ii. Compound journal entry – One which has two or more elements and often
represents two or more transactions.
Accounts are the storage units of accounting information and used to summarize changes in assets,
liabilities and equity including income and expenses. The following are a broad classification of
kinds of accounts:
1. Real account – Statement of financial position or so-called permanent accounts. These
accounts are not closed and carryover to the next accounting period. (ex. Cash, AR and
PPE)
2. Nominal account – Income statement or temporary capital accounts. These accounts are
closed at the end of the accounting period. (ex. Sales and expenses)
3. Mixed account – A combination of real and nominal accounts. (ex. Prepaid expenses)
4. Clearing account – Holds temporarily certain information pending transfer to other ledger
accounts.
5. Controlling account – The general ledger account that summarizes the detailed information
in a subsidiary ledger.
6. Suspense account – Is an account that temporarily holds certain information pending for
disposition.
7. Reciprocal account – Has a counterpart in another book within the entity or in another
ledger or another entity.
8. Principal account – An account that is independent or can stand alone.
9. Auxiliary account – An account that cannot stand alone and are technically neither assets,
liabilities nor income and expenses.
10. Summary account

- Posting - It is the process of transferring data from the journal to the appropriate accounts
in the general ledger and subsidiary ledger. This process classifies all accounts that were
recorded in the journals.

Kinds of ledgers
1. General ledger – Includes all the accounts appearing on the financial statements.
2. Subsidiary ledgers – Affords additional detail in support of certain general ledger accounts.

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SUMMARIZING PHASE
1. Preparing the unadjusted trial balance – A list of general ledger accounts with their
respective debit or credit balance. The purpose of the unadjusted trial balance is to provide
evidence that the total debits in the general ledger equal the total credits and prepares the
accounts for adjustments.
2. Preparing adjusting entries – To take up accruals, expiration of prepayments and
deferrals, estimations and other events often not signaled by new source documents.
Adjusting entries are made at the end of each accounting period. The concepts involved
behind adjusting entries are ACCRUAL, MATCHING OF COSTS AGAINST REVENUE
and ACCOUNTING PERIOD.

Typical Adjusting Entries classified according to timing of cash flow.

A. Prepayments and Deferrals – The cash flow precedes the revenue or the expense
recognition.

B. Accruals – Income or expense recognition precedes the cash flow.

i. Accrued Income – Income earned but not yet received. A receivable is always
debited and income is recognized (credited)
ii. Accrued expenses – Expenses incurred but not yet paid. An expense is
recognized (debited) and a liability is always credited.

C. Estimates – Adjusting entries that do not involve cash flows.

i. Doubtful accounts – The expense to be matched against credit sales.
ii. Depreciation - Allocation of the cost of fixed assets as expense over its useful life

D. Ending inventory - An adjustment to set up the year-end physical count of the inventory.
This only applies if the PERIODIC INVENTORY SYSTEM IS USED.

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 E. Preparing the financial statements – The most important part of the summarizing phase,
this is where the processed information is communicated to external users.

Basic financial statements

i. Statement of financial position
ii. Income statement or a statement of comprehensive income
iii. Statement of changes in equity
iv. Statement of cash flows
v. Notes and disclosures

F. Preparing the closing entries – Recorded and posted for the purpose of closing all
nominal or temporary accounts to the income summary account and the resulting net
income or loss is afterwards closed to the capital or retained earnings account.
G. Preparing the post-closing trial balance – A listing of general ledger accounts and their
balances after closing entries have been made. The post-closing trial balance is the same
with the year-end statement of financial position, the only difference is that valuation
accounts like allowances for assets are found in the credit side instead of being deducted
from the related asset account.
H. Preparing reversing entries – The last and optional step in the accounting cycle.
Reversing entries are made at the beginning of the new accounting period to reverse certain
adjusting entries from the succeeding accounting period.
The purpose of reversing entries is a matter of convenience for accruals and consistency for the
adjustments in the following year for prepaid expenses and deferred income when the income
statement method was used to record the cash flow.
Once again, reversing entries will only apply to the following but remember that they are not
necessary and only optional:
1. Accrued income
2. Accrued expense
3. Prepaid expense, only if the expense method was used in recording the payment
4. Unearned income, only if the income method was used in recording the collection

If the reversing entry was not prepared, the adjustment would have been a debit to Rent expense
and credit to prepaid rent for if the adjustment used ASSET METHOD.

Summary and Reflection

Summary:
The accounting cycle comprises 9 steps, primarily focusing on recording and summarizing financial
transactions. In the recording phase, transactions are analyzed and documented in journals like sales,
purchases, cash receipts, and cash disbursements. Accounts serve as storage for summarizing changes in
assets, liabilities, equity, income, and expenses. Posting transfers these journal entries to the general ledger
and subsidiary ledgers.

Reflection:
The accounting cycle provides a structured framework for accurate financial reporting, ensuring that all
transactions are properly analyzed, recorded, and summarized. It highlights the importance of precision and
consistency in handling financial data. By following this step-by-step process, businesses can ensure their
financial statements reflect a true and fair view of their performance and position. This reinforces the role of
accounting as a reliable tool for decision-making and accountability.

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