The Accounting Process

Introduction
Accounting is “the process of identifying, measuring, and
communicating economic information to permit informed
judgments and decisions by users of the information.”¹

Accounting information system is the system of

collecting and processing transaction data and
disseminating financial information to interested parties.¹

_________________________________________
 ¹Zeus Vernon B. Millan, Intermediate Accounting 1A, 2018 Edition
Management information system (MIS) is a set of data
gathering, analyzing, and reporting functions designed to
provide management with the information it needs to
carry out its functions.¹

The major components of an MIS include the following:

1. Accounting Information System or Financial
Information System¹
2. Personnel Information System¹
3. Logistics Information System¹
Components of Accounting Information System
1. Personnel directly involved in accounting work¹
2. Accounting policies and standards¹
3. Procedures or set of interrelated activities involving
the originating, processing and reporting of financial
and related information.¹
4. Equipment and devices used in the system to
expedite work, to provide controls, and prevent fraud
and errors.¹
5. Records and reports necessary to gather, process,
store and, transmit financial and other information.¹
 The Accounting Cycle
The accounting cycle represents the steps or
procedures used to record transactions and prepare
financial statements.¹
The accounting cycle implements the accounting
process.¹
 Steps in the Accounting Cycle
 1. Identifying and analyzing business documents or
transactions
 2. Journalizing
 3. Posting
 4. Preparing the unadjusted trial balance
 5. Preparing the adjusting entries
 6. Preparing the adjusted trial balance
 7. Preparing the financial statements
 8. Closing the books
 9. Preparing the post-closing trial balance
 10. Recording of reversing entries.
 Accounting Records of a Business Entity
1. Business or source documents – these are the
original source materials evidencing a transaction.¹
Examples: Sales invoices, official receipts, vouchers,
statements of account
2. Books of accounts
A. Journal
B. Ledger
 Systems of Recording
Transactions
1. Double entry system – Under this system, each
transaction is recorded in two parts – debit and credit.
The double entry system makes use of the following
concepts:
A. Duality – this concept views each transaction as
having two-fold effect on values – a value received
and a value parted with.¹
B. Equilibrium – this concept requires each
transaction recorded in terms of equal debits and equal
credits.¹
Double entry system is in line with the PFRSs
because profit or loss is determined through the
“transaction approach” (difference between income
and expense).¹
The accounts recognized under the double entry
system are: Assets, Liabilities, Equity, Income and
Expenses
The books of accounts used under the double entry
system are: Journal, Special Journal, Ledger,
Subsidiary Ledger, and other important books.
 2. Single entry system – Under this system, each transaction is
recorded through simple narrative.¹
 Transactions are not analyzed in terms of debits and credits.
 Profits or loss for the period is determined through the “capital
maintenance approach” or by comparing the beginning and
ending balances of equity.¹
 This type of recording is not in line with the PFRSs because
profit or loss is not determined using the transaction approach.
 The accounts recognized under the single entry system include:
Cash, Accounts Receivable, Accounts Payable, and Equity.
 The books of accounts used under the single-entry system
include: Cash books and subsidiary ledgers (personal accounts).
 Journal
Journalizing is the process of recording transactions
in the journal by means of journal entries.¹
The Journal (also called the book of original entry) is
a formal record where transactions are initially
recorded chronologically through journal entries.¹
 Types of Journals
 1. General Journal – a book of original entry used to
record transactions other than those that are recorded in the
special journals.
 2. Special Journal – a book of original entry used to
record transactions of a similar nature.
 Examples:
 A. Sales journal – used to record sales on account.
 B. Purchases journal – used to record purchases of
inventory on account
 C. Cash receipts journal – used to record all transactions
involving receipts of cash.
 D. Cash disbursement journal – used to record all
transactions involving payments of cash.
 Type of Journal Entries
A. Simple journal entry – one which contains a single
debit and a single credit element.¹
B. Compound journal entry – one which contains two
or more debits or credits.¹
C. Adjusting entries – entries made prior to the
preparation of financial statements to update certain
accounts so that they reflect correct balances as at the
designated time.¹
D. Closing entries – entries made at the end of the
accounting period after all adjustments have been made
to zero out the balances of all nominal accounts and to
update the retained earnings account.¹
E. Reversing entries – entries usually made on the first
day of the accounting period to reverse certain
adjusting entries in the immediately preceding period.¹
F. Correcting entries – entries made to correct
accounting errors.¹
G. Reclassification entries – entries made to transfer
an amount from one account to another account that
better describes the nature of the transaction being
recorded.¹
 Ledger
Posting is the process of transferring data from the
journal to the appropriate accounts in the ledger.¹
The purpose of posting is to classify the effects of
transactions on specific asset, liability, equity, income
and expense accounts in order to provide more
meaningful information.¹
The ledger (also called the book of secondary entries
or book of final entries) is a systematic compilation of
a group of accounts.¹
 Kinds of Ledgers
A. General ledger – contains all the accounts
appearing in trial balance.
B. Subsidiary ledger – provides a breakdown of the
balances of controlling accounts.
 Account
Account is the basic storage of information in
accounting, e.g., “cash,” “accounts receivable,” “land”

Accounts in the ledger follow the format of a T-

account, wherein the left side is called the debit side
and the right side is called the credit side.¹
The term debit means to the left side of an account
while credit means the right side.
Chart of accounts is a list of all the accounts used by
the entity.¹
To promote comparability, account titles should
conform to PFRSs and industry practices.
Regulated entities should have charts of accounts that
conform to relevant regulations.
 Types of Accounts
1. Real accounts – are accounts that are not closed at
the end of the accounting period. These accounts are
shown in the statement of financial position.¹
2. Nominal accounts – are accounts that are closed at
the end of the accounting period. These accounts
include all income and expenses accounts, drawings
and dividend accounts, clearing accounts and suspense
accounts.¹
3. Mixed accounts - are accounts that have both real
and nominal account components. These accounts are
subject to adjustment.¹
4. Contra accounts – are accounts that are deducted
from a related account.¹
5. Adjunct accounts – are accounts that are added to a
related account.¹
 Trial Balance
A trial balance is a list of general ledger accounts and
their balances.¹
It is prepared to check the equality of total debits and
total credits in the ledger.¹
 Types of Trial Balance
A. Unadjusted trial balance – this prepared before
adjusting entries. It contains real, nominal, and mixed
accounts.¹
B. Adjusted trial balance – this is prepared after
adjusting entries. It contains real and nominal
accounts.¹
C. Post closing trial balance – this is prepared after
the closing process. It contains real accounts only.¹
 Errors Revealed by a Trial
Balance
1. Journalizing or posting one half of an entry, i.e., a
debit without a credit, or vice versa.¹
2. Recording one part of an entry for a different
amount other than the other part.¹
3. Transplacement error (slide error) on one side of an
entry.¹
4. Transposition error on one side of an entry.¹
 Errors Not Revealed by a Trial
Balance
1. Omitting entirely the entry for a transaction¹
2. Journalizing or posting an entry twice.¹
3. Using a wrong account with the same normal
balance as the correct account.¹
4. Wrong computation with the same erroneous
amount posted to both the debit and credit sides.¹
 Adjusting Entries
Adjusting entries are entries made prior to the
preparation of financial statements to update certain
accounts so that they reflect correct balances as of the
designated time.¹
All adjusting entries involve at least one statement of
financial position and one statement of profit or loss
and other comprehensive income account.¹
All adjusting entries affect the comprehensive income
for the period.¹
 Purpose of Adjusting Entries
A. To take up unrecorded income and expense of the
period (e.g., accruals for income and expenses).¹
B. To split mixed accounts into their real and nominal
elements (e.g., adjustments to prepayments and
unearned income).¹
 Methods of Initial Recording of Income and Expenses
 Income
 Advanced collections of income may initially be recorded using
either the (1) liability method or the (2) income method.
 1. Liability method – under this method, advanced collections
of income are initially credited to a liability account. At the
end of the period, the earned portion is recognized as income
while the unearned portion remains as liability.¹
 2. Income method – under this method, advanced collections of
income are initially credited to an income account. At the end
of the period, the unearned portion is recognized as liability
while the earned portion remains as income.¹
Illustration 1: Liability method vs. Income method
A business rents out its building to various tenants. On
April 1, 20x1, the business receives one year rent in
advance of P120,000 from one of its tenants. Rent per
month is P10,000.
The receipt of the advance rent is recorded as follows:
 Liability method Income method
Apr. 1, 20x1 Apr. 1, 20x1
Cash 120,000 Cash 120,000
 Unearned rent 120,000 Rent income 120,000
The adjusting entries (AJE) on December 31, 20x1
are as follows:
 Liability method Income method
Dec, 31, 20x1 Dec. 31, 20x1
Unearned rent 90,000 Rent income 30,000
 Rent income 90,000 Unearned rent
30,000
  Expenses
 Prepayments of expenses may initially be recorded using
either the (1) asset method or (2) expense method.
 1. Asset method – under this method, prepayments of
expenses are initially debited to an asset account. At the
end of the period, the incurred portion (‘used up’ or
‘expired’) is recognized as expense while the unused
portion remains as asset.¹
 2. Expense method – under this method, prepayments are
initially debited to an expense account. At the end of the
period, the unused portion (‘not yet incurred’ or
‘unexpired’) is recognized as asset while the incurred
portion remains as expense.¹
Illustration 2: Asset method vs. Expense method
A business prepays one-year insurance for P120,000 on
October 1, 20x1. The prepayment of insurance is
recorded as follows:
 Asset method Expense Method
Oct. 1, 20x1 Oct. 1, 20x1

Prepaid insurance 120,000 Insurance expense 120,000

 Cash 120,000 Cash
120,000
The adjusting entries on December 31, 20x1 are as
follows:
 Asset method Expense method
Dec. 31, 20x1 Dec. 31, 20x1
Insurance expense 30,000 Prepaid insurance
90,000
 Prepaid insurance 30,000 Insurance expense
90,000
Illustration 3: Adjusting entries
ABC Co. records all disbursements using nominal
accounts (i.e. expense method). On December 31,
20x1, ABC Co. has total expenses of P1,000,000
before considering the following:
A. Advertisement costs paid during December 20x1
totaled P10,000. The advertisement was aired on TV
on January 5, 20x2.
B. A two-year insurance on assets was obtained on
July 1, 20x1 for P24,000.
C. On July 15, 20x1, ABC Co. entered into an operating
lease requiring monthly payments of P60,000 starting on
the date of the lease contract and monthly thereafter.
D. Office supplies expense has a balance of P20,000.
The physical count of office supplies revealed a balance
of P16,000.

Requirements:
A. Provide the necessary adjusting entries.
B. Compute for the adjusted total expenses.
Requirement A: Adjusting entries
Item A:
December 31, 20x1
Prepaid Advertising 10,000
 Advertising Expense 10,000

Item B:
December 31, 20x1
Prepaid insurance 18,000
 Insurance expense 18,000
Item C:
December 31, 20x1
Prepaid rent 30,000
 Rent expense 30,000

Item D:
December 31, 20x1
Office supplies 16,000
 Office supplies expense 16,000
Requirement B: Adjusted total expenses
Unadjusted total expenses 1,000,000
Prepaid advertisement cost (10,000)
Unexpired portion of prepaid insurance (18,000)
Unexpired portion of prepaid rent (30,000)
Unused office supplies (16,000)
Adjusted total expenses 926,000
 Worksheet
A worksheet is an analytical device used to facilitate the
gathering of data for adjustments and the preparation of
financial statements and closing entries.¹
Worksheets are usually prepared because they greatly
facilitate the orderly preparation of the financial
statements.
The heading of the worksheet shows the following:
A. Name of the entity
B. Title of the report
C. Date covered by the report
Illustration: Worksheet
The total credits in the statement of financial position
columns of a worksheet are P720,400 while the total
debits in the income statement columns are P246,800.
The total debits in the adjusted trial balance are
P990,000.

Requirement: How much is the profit/(loss) for the

period?
Total debits in adjusted trial balance (which is equal to total
credits) composed of real and nominal accounts 990,000
Total credits in statement of financial position
Columns composed of real accounts only (720,400)
Total credits representing nominal accounts only 269,600
Total debits of nominal accounts ( 246,800)
Profit – excess of nominal credits over nominal
 debits 22,800
 Financial Statements
Financial statements are the means by which the
information accumulated and processed in financial
accounting is periodically communicated to the users.¹
Financial statements are the end products of the
accounting process.¹
A complete set of financial statements consists of:
1. Statement of financial position
2. Statement of profit or loss and other comprehensive
income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes
A. Comparative information
6. Additional statement of financial position (required
only when certain instances occur)
The heading of the financial statements shows the
following:
A. Name of the reporting entity
B. Title of the financial statement
C. Reporting period

The statement of financial position is dated as at the

end of the reporting period. The statements of profit
or loss and comprehensive income, changes in equity,
and cash flows are dated covering the reporting period.
Notes to the financial statements are dated by the end of
the reporting period.
 Closing Entries
Closing the books is the process of preparing closing
entries for nominal accounts and ruling and balancing
real accounts.
Closing entries are entries prepared at the end of the
accounting period to “zero out” all temporary or
nominal accounts in the ledger.¹
 Post Closing Trial Balance
The post closing trial balance is prepared in order to
prove the equality of debits and credits in the ledger
after the closing process.¹
It contains statement of financial position accounts
only because all income statement accounts are
closed.¹
The post closing trial balance contains the balances
that are extended to the next accounting period.¹
 Reversing Entries
Reversing entries are entries usually made on the first
day of the accounting period to reverse certain adjusting
entries in the immediately preceding period.¹

The following are the purposes of reversing entries:

1. To facilitate recording of cash receipts and
disbursements in the next accounting period.¹
2. To promote convenience in recording the next
period’s year end adjustments for accruals;¹ and
3. To promote consistency of accounting procedure.¹
Only the adjusting entries made for the following may
be reversed:
1. Accruals for income or expense¹
2. Prepayments initially recorded using the expense
method.¹
3. Advanced collections initially recorded using the
income method.¹
Disclaimer: This power point presentation is for
classroom instruction only. Not for publication.

SOURCE AND REFERENCE:

 Zeus Vernon B. Millan, Intermediate Accounting 1A,
2018 Edition
End of Presentation