MODULE 5

THE FIRST FOUR STEPS IN THE

ACCOUNTING PROCESS

Financial Accounting and Reporting 1

(for Servicers and Providers)
By:
ProfProf Zenaida
Zenaida Vera Cruz-Manuel
Vera Cruz-Manuel
 Study
Study Outcomes
Outcomes
A student should be able to:
a. explain the first four steps in the accounting
process.
b. explain what an account is and how the T
Account analysis is performed. b. define
debit and credit and explain their uses in
recording business transactions.
c. identify the basic steps in the recording
process.
d. explain what a journal is and how it helps in
the
recording process.
e. explain what a ledger is and how it helps in the
posting Vera
Prof Zenaida process.
Cruz-Manuel
The
The First
First Four
Four Steps
Steps in
in the
the Accounting
Accounting
Process
Process
The Recording
Steps in the
and Posting The Trial
The Account Recording and
Process Balance
Posting Process
Illustrated
Transaction Journal Illustration of Preparing TB
Analysis Ledger recording and Limitations of a
T Account posting trial balance
Debits and Locating errors
Credits

Prof Zenaida Vera Cruz-Manuel

 THE
THE ACCOUNT
ACCOUNT

Account Records of increases or decreases in a

specific value (asset, liability or owner’s
equity)

Transaction Analysis is done using a T

account with a left side (debit side)
and a right side (credit side) and with
an account title on top. CASH

debit
+ credit
-

Prof Zenaida Vera Cruz-Manuel

Debits
Debits and
and Credits
Credits

Double-entry accounting system

Each transaction must affect two or more
accounts to keep the basic accounting
equation in balance.

Recording done by debiting at least one

account and crediting another account.

DEBITS must equal CREDITS.

Prof
ProfZenaida
ZenaidaVera
VeraCruz-Manuel
Cruz-Manuel
 ANALYZING
ANALYZING TRANSACTIONS
TRANSACTIONS USING
USING TT
ACCOUNTS
ACCOUNTS
The T Account gives you another way of analyzing transactions with each
account separately analyzed for increases and decreases in the values. It got its name
because it resembles the letter T and is convenient to use as it has two sides- the left
side and the right side where the increases and decreases are separately placed. At
the center of the T account is the name or title of the account. In accounting, the left
side is called the debit side and the right side is called the credit side. To illustrate:

CASH
left or right or
debit credit
+ -

Prof Zenaida Vera Cruz-Manuel

 DEBITS
DEBITS AND
AND CREDITS
CREDITS

When an amount is to be recorded on the left side, we simply say debit the account, and
when it is to be recorded on the right side, we say credit the account. What happens when
the amount is placed on the left OR debit side and on the right or credit side of an account?

Assets increase on the debit side

Liabilities and Owner’s Equity increase on the credit side based on their position in the
accounting equation:

Assets = Liabilities + Owner's Equity

Debit side Credit side
Left Side Right Side

Prof Zenaida Vera Cruz-Manuel

 Observe
Observe the
the following
following rules:
rules:
• Increases in assets are recorded on the debit side of the
account, while decreases in assets are recorded on the
credit side of the account.
• Increases in liabilities are recorded on the credit side of
the account, while decreases in liabilities are recorded on
the debit side of the account.
• Increases in owner's equity are recorded on the credit
side of the account, while decreases in owner's equity
are recorded on the debit side.

• ProfZenaida
Prof Zenaida Vera Cruz-Manuel
Vera Cruz-Manuel
Debits
Debits and
and Credits
Credits and
and their
their
balances
balances
If Debits are greater than Credits, the
account will have a debit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction 1 P10,000 P3,000 Transaction 2

Transaction 3 8,000

Balance P15,000

Prof Zenaida Vera Cruz-Manuel

Debits
Debits and
and Credits
Credits

If Credits are greater than Debits, the

account will have a credit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction 1 P10,000 P3,000 Transaction 2

8,000 Transaction 3

Balance P1,000

Prof Zenaida Vera Cruz-Manuel

 NORMAL
NORMAL BALANCES
BALANCES

DO IT no 1!!
SOLVE EX 1 AND 2 PAGE 112
Prof Zenaida Vera Cruz-Manuel
 Illustrative
Illustrativeproblem:
problem:TTAccount
AccountAnalysis
Analysis

Prof Zenaida Vera Cruz-Manuel

 TT ACCOUNT
ACCOUNT ANALYSIS
ANALYSIS

Prof Zenaida Vera Cruz-Manuel

 Double
Double Entry
Entry Bookkeeping
Bookkeeping

Prof Zenaida Vera Cruz-Manuel

 WHAT
WHAT IS
IS AA CHART
CHART OF
OF ACCOUNTS
ACCOUNTS
Chart of Accounts is simply a listing of all account titles, the number and nature
of which depend on the type of business operation. The accounts are properly
arranged with the assets followed by the liabilities and the owner's equity.
Account numbers are assigned for easy reference usually with an allowance for
accounts to be added. Using the Baron problem:
Assets- Owner’s Equity
1 Cash 21 Baron, Capital
2 Accounts Receivable 22 Baron, Drawing
3 Equipment 23 Repair Income
4 Tools 24 Light Expense

Liabilities
11 Accounts Payable
Go over page 94 which gives another example of a
Chart of Accounts

SOLVE EX. 4 113

Prof Zenaida Vera Cruz-Manuel

 Let’s DO IT NO 2!!

Go over the illustrations on pages 95 to 99 for T Account

Analysis.

Solve Exercise 4 page 113: CONSTRUCT T ACCOUNTS:

a) analyze the transactions using T Account Analysis.
b) extract the balances – list of balances in your T accts
c) prepare a trial balance to prove the equality of the
debit and credit totals. Read first on what is a trial
balance and how this is prepared slide 34 and on pages
107-108 in the textbook.
Prof Zenaida Vera Cruz-Manuel
AIS describes the accounting cycle as consisting of a series of steps
(Phases 1 to 4) in gathering, processing, summarizing and reporting
meaningful information. These steps are normally performed in one
accounting period. The first four steps of the accounting cycle are
the following:
. Gather data based on various documents.
• Analyze and record the documents in the journal.
• Classify and post from the journal to the ledger.
• Extract the balances of the accounts in the ledger and prepare a
trial balance.

The remaining steps in the accounting cycle are done at the end of
the accounting period (usually yearly)

Prof Zenaida Vera Cruz-Manuel

 First
FirstFour
FourSteps
Stepsin
inthe
theAccounting
AccountingCycle
Cycle

BUSINESS DOCUMENTS

Source documents evidencing

transactions of a business. Typical
examples of these are on pages 92 to 94.

Let’s DO IT NO 3 ! Solve the multiple choice nos in slides 19 to 22 .

Prof Zenaida Vera Cruz-Manuel

Debits
Debits and
and Credits
Credits Summary
Summary
Review Question Encircle the
letter of your choice
Let’sDo
Doit it!!!NO 3!!!
Debits:
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities

Prof Zenaida Vera Cruz-Manuel

 Debits
Debits and
and Credits
Credits Summary
Summary
Review Question Encircle the
letter of yourLet’s
choice
DO IT !

Credits:
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities

Prof Zenaida Vera Cruz-Manuel

 Revenue
Revenue and
and Expense
Expense
LETS DO IT !
Encircle your letter choice

The following are correct except:

a. The purpose of earning revenues is to benefit

the owner(s).

b. The effect of debits and credits on revenue

accounts is the same as their effect on Owner’s
Capital.

c. Expenses have the opposite effect: expenses

decrease owner’s equity on the debit side.

d. Revenues increase assets and liabilities.

Prof Zenaida Vera Cruz-Manuel
 Debits
Debits and
and Credits
Credits Summary
Summary

Review-encircle your letter

Let’s Do it !!!

choice
Accounts that normally have debit balances
are:
a. assets, expenses, and revenues.
b. assets, expenses, and owner’s capital.
c. assets, liabilities, and owner’s drawings.
d. assets, owner’s drawings and expenses

Prof Zenaida Vera Cruz-Manuel

 The
The Journal
Journal
Book of original entry (General Journal).

Transactions are recorded in chronological

order.

The simplest form is called a 2 column

general journal.

Benefits of the recording process:

1. Discloses the complete effects of a
transaction.

2. Provides a chronological record of

transactions.
Prof3.Zenaida Vera
Helps to Cruz-Manuel
prevent or locate errors because the
 Journalizing
Journalizing
Journalizing – process of entering transaction
data in the journal.
Presented below is information related to Baron Repair Shop.

May Baron started a repair shop with a cash investment

1 of P50,000.
2 Purchased repair equipment and paid cash P25,000.
3 Paid for light expense, P4,000

4 Received cash for repair work done, P5,500.

5 Baron withdrew cash for personal use, P1,000
6 Baron charged a customer for repair work done, P6,000
7 Baron purchased repair tools on account, P10,000.
Read pages 100 to 103 of the textbook

Prof Zenaida Vera Cruz-Manuel

 General
General Journal
Journal
2019 ACCOUNTS & EXPLANATION F DEBIT CREDIT
May 1 Cash P 50 000 00
Baron, Capital P 50 00
Cash put up to open 000
business.
2 25 000 00
Equipment 25 00
Cash 000
Cash paid for equipment
purchased.
3 4 000 00
Light Expense 00
Cash 000
Paid cash for light expense. .
5 500 00
4 Cash 00
Repair Income 4 500
Cash received for work
done. 1 000 00
00
000
5 Baron, Drawings
Cash 5
Cash withdrawal by Baron. 6 000 00
00
Accounts Receivable 1
000
Repair Income
6 Work charged to customer 10 000 00
00
Tools 000
Prof Zenaida Vera Cruz-Manuel
Accounts Payable
Bought tools on account
6
 Journalizing
Journalizing
Simple Entry – Two accounts, one debit and one
credit.
Compound
Example – On Entry
June 1, –Baron
Threepurchased
or more accounts.
equipment for
P15,000 by paying cash of P15,000 and the balance to be
paid within 30 days General Journal

Date Account Title Ref . Debit Credit

J une 15 Equipment 15,000
Cash 10,000
Accounts Payable 5,000
(Purchased equipment)

Prof Zenaida Vera Cruz-Manuel

SolS
Let’s DO IT NO 4!

Solve also ex. 10 requirements a) and b

Read slides 28 to 35 and continue solving ex 10

requirements c and d)

Prof Zenaida Vera Cruz-Manuel

 The
The Ledger
Ledger

A General Ledger contains the entire

group of accounts maintained by a
company.
IT ! Read
It is called thepages 100 to of
book 103 of the textbook
final entry.

The General Ledger includes all the asset,

liability, owner’s equity, revenue and
expense accounts.
Read pages 104 to 107 of the textbook

Prof Zenaida Vera Cruz-Manuel

 Standard
Standard Form
Form of
of Account
Account

T-account form used as an analytical tool in

accounting.
In practice, the account forms used in ledgers are
much more formally structured such as the Cash
ledger shown below:.
CASH Acct No 101
Date Explanation F Debit Credit Balance

Debit Credit

March 1 Investment by Baron J1 50 000 50 000

2 Purchase of equipment J1 25 000 25 000

Prof
3 Zenaida
Payment Vera
of light bill Cruz-Manuel
J1 4 000 21 000
 Posting
Posting
This is a process of transferring amounts from
the
journal to the ledger. Each account has a
separate ledger page, such as the cash ledger
shown below.
Date A ccount T itle Ref . Debit Credit
J une 15 Equipment 15,000
Cash 10,000
A ccounts Payable 5,000
(Pur chased equipment)

Cash Acct. No. 101

Date Explanation Ref. Debit Credit Balance

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 POSTING
POSTING

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Prof Zenaida Vera Cruz-Manuel
Prof Zenaida Vera Cruz-Manuel
The
The Trial
Trial Balance
Balance
BARON REPAIR SHOP
TRIAL BALANCE
MAY 7, 2022
A list of accounts Debit Credit
and their Cash P25,500
Accounts Receivable 6,000
balances at a Equipment 25,000
given time. Tools 10,000
Accounts Payable P10,000
Purpose is to Baron, Capital 50,000
prove that debits Baron, Drawings 1,000
Revenue Income 11,500
equal credits. Light Expense 4,000
______ ______
Totals P71,500 P71,500

Prof Zenaida Vera Cruz-Manuel

 DO IT NO 5
SLIDES 35-36
Posting
Posting
DO IT! Review-encircle your letter
choice
Encircle the letter of the correct answer.
Posting
a. normally occurs before journalizing.
b. transfers ledger transaction data to the
journal.
c. is an optional step in the recording
process.
d. transfers journal entries to ledger
accounts.
Prof Zenaida Vera Cruz-Manuel
 DO IT
The
The Trial
Trial Balance
Balance
DO IT! Review-encircle your letter
choice
A trial balance will not balance if:
a. a correct journal entry is posted twice.
b. the purchase of supplies on account is
debited to Supplies and credited to Cash.
c. a P1,000 cash drawing by the owner is
debited to Owner’s Drawing for P1,000 and
credited to Cash for P100.
d. a P450 payment on account is debited to
Accounts Payable for P45 and credited to
Cash for P45.

Prof Zenaida Vera Cruz-Manuel

 SUBSIDIARY LEDGERS AND CONTROL ACCOUNTS

Prof Zenaida Vera Cruz-Manuel

SUBSIDIARY LEDGERS AND CONTROL ACCOUNTS

Prof Zenaida Vera Cruz-Manuel

SUBSIDIARY LEDGERS AND CONTROL ACCOUNTS

Prof ZenaidaRefer
DO IT no
Verato
Cruz-Manuel
Ex 10 make posting to the
Recording
Recording Process
Process
DO IT no
DO IT! Proper flow of processing
7!!!

Jaime is confused about how accounting information

flows through the accounting system. He believes
the flow of information should follow this order:
a. Debits and credits from journals posted to ledger.
b. Business transactions occur based on documents.
c. Information entered in the journal.
d. Financial statements are prepared.
e. Trial balance is prepared.
Arrange the flow of processing for Jaime.

Prof Zenaida Vera Cruz-Manuel

The
The Trial
Trial Balance
Balance
DO IT no
7!!! Limitations of a Trial Balance
The trial balance may balance even when
1. a transaction is not journalized,
2. a correct journal entry is not posted,
3. a journal entry is posted twice,
4. incorrect accounts are used in journalizing or
posting, or
5. offsetting errors are made in recording the
amount of a transaction.

Prof Zenaida Vera Cruz-Manuel

 TRIAL BALANCE- LOCATING ERRORS

Prof Zenaida Vera Cruz-Manuel

 TRIAL BALANCE- LOCATING ERRORS

DO IT 8!!
Prof ZenaidaSolve
Vera exercise 12 pages 116-117
Cruz-Manuel
 END OF MODULE 5

Prof Zenaida Vera Cruz-Manuel